Fed widens scope of regulation

From the AP:

Federal Reserve, states to probe subprime lenders

Federal and state banking regulators on Tuesday said they would step up their scrutiny of lenders that make home loans to people with shaky credit, focusing on companies that operate outside federal banking oversight.

The pilot program announced by the Federal Reserve, two other federal agencies and state banking officials is scheduled to start in the fourth quarter and affect about 12 lenders. It will be designed to examine firms that account for the majority of subprime loans, a high-rate, high-risk category that has experienced a surge of defaults in recent months.

Numerous subprime lenders have since gone bankrupt or have been sold. Foreclosures were up 87 percent last month from year-ago levels, real estate information company RealtyTrac said last week.

Last month, Rep. Barney Frank, chairman of the House Financial Services Committee, threatened to strip the Federal Reserve of its authority to write rules against mortgage abuses if the central bank did not act quickly. And Sen. Christopher Dodd, D-Conn., a presidential candidate who heads the Senate Banking Committee, said in May that a ”chronology of regulatory neglect” allowed the problems in the subprime market to go unchecked.

Only about a quarter of subprime loans in 2005, the most recent year available, were made by federally regulated banks, according to the Fed. Instead, they were made by state-licensed lenders and subsidiaries of federally regulated banks that operate with limited federal regulation.

The agencies said they would coordinate reviews of lenders and mortgage brokers to make sure they comply with consumer protection laws, and evaluate the lenders’ underwriting standards.

In a joint statement, the agencies said they would ”initiate appropriate corrective or enforcement action as warranted by the findings of the reviews or investigations.”

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