From the LA Times:
The Federal Reserve clamped down hard on mortgage lenders Monday, issuing rules designed to curb the sorts of risky and deceptive lending practices that helped trigger the subprime mortgage crisis.
The Fed’s action, although criticized by some for not going far enough, was widely seen as a crucial step in reasserting control over a financial market that had been allowed to run wild.
“There’s lots more to come,” said Thomas Lawler, a former Fed official who is now a housing market consultant. “The pendulum is clearly swinging toward more regulation and more government involvement.”
The central thrust of the new rules is to restore sound underwriting practices, such as requiring lenders to verify that borrowers actually have the income and assets to make their loan payments.
The regulations adopted Monday were significantly stiffer than draft proposals issued six months ago, reflecting regulators’ intensifying concern over the fallout from the free-for-all lending that helped create the bubble in home values and led to the mortgage meltdown.
In adopting the new rules on mortgage lending, Fed Chairman Ben S. Bernanke traced the lenders’ woes back to their own practices.
“Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower,” Bernanke said in a statement.
The new rules take effect Oct. 1 and will apply to all mortgage lenders, brokers, servicers and banks, not just those already regulated by the central bank.
“These rules are a step forward in returning common-sense business practices to the subprime lending market,” said Paul Leonard, director of the California office of the Center for Responsible Lending, a nonprofit advocacy group.
The Fed’s final version of the regulations were much more stringent than draft proposals issued late last year. The new rules include four measures aimed at targeting abuses in the subprime mortgage market, which has been largely unregulated because the loans are securitized and held by private investors.
Reinhart of the American Enterprise Institute said the rules also reflected an about-face from the relaxed attitude toward mortgage lending that prevailed under former Fed Chairman Alan Greenspan.
“Alan Greenspan believed in the light hand of regulation. How he put that in place was in not moving at all, and that turns out not to be desirable,” Reinhart said. “So now the government is taking an active role.”