From the Philadelphia Inquirer:
Banking regulators completed guidelines yesterday that call on lenders to strictly evaluate borrowers’ ability to repay home loans.
The guidance, issued by the Federal Reserve and the four other federal agencies that regulate banks, thrifts and credit unions, is a response to an increasingly troubled housing market and pressure from Congress. Home prices have been falling and interest rates have been climbing – two factors that are causing a sharp increase in defaults, especially on so-called subprime mortgages given to buyers with shaky credit.
The new standards, which apply only to federally regulated lenders, call for verification of borrowers’ incomes in most cases. They also say consumers should be given clear disclosure of their mortgage terms and at least 60 days without penalty to refinance a loan that is about to jump up to a higher rate. Noncompliance could result in warnings and financial penalties for the lenders.
Trade groups representing mortgage lenders said the guidelines come with a downside – they will reduce the availability of credit for borrowers – and they urged Congress not to pass legislation that would put similar standards into law.
Lawmakers, some of whom accuse the Fed of having been lax in its oversight of the mortgage market for many years, have been urging the central bank to strengthen the guidelines. Although the guidelines would not affect state-regulated mortgage companies, many state banking regulators are expected to follow suit.
In addition to the Fed, the agencies issuing the new guidance are the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Treasury Department’s Office of the Comptroller of the Currency and Office of Thrift Supervision.