WASHINGTON — The Federal Reserve on Tuesday proposed new mortgage lending rules to protect consumers against fraud and deception, but consumer advocates said lenders would still have the ability to make the kinds of bad loans that triggered the sub-prime lending crisis.
The Fed proposal would require lenders who make sub-prime loans to consider borrowers' abilities to make payments and to verify that they have the income and assets they claim.
It also would require better disclosure of special bonuses that mortgage brokers earn when they write loans at higher rates than a borrower is eligible to receive.
The Fed proposal consists of measures specifically aimed at higher-cost sub-prime loans for people with poor credit, as well as broader rules that would apply to all home loans. The measures were released for a three-month public comment period, after which the Fed could adopt them with or without revisions.
For all loans, mortgage brokers would be required to disclose in writing whether they received "yield-spread premiums," or bonuses for selling loans at interest rates that were higher than a borrower qualified for.
Consumer activists said the measures were a step in the right direction but didn't go far enough. For example, borrowers who suspect their lender broke the rules would have to prove "a pattern or practice" of abusive lending, noted Kurt Eggert, a professor at Chapman University's law school in Orange and a member of the Fed's Consumer Advisory Council.
"To prove what the lender's real policy is, a borrower would have to examine potentially hundreds of loan files, while the lender would be screaming about privacy for other borrowers," Eggert said. "This could be an insurmountable burden."
In announcing the new measures, Fed Chairman Ben S. Bernanke said, "Mortgage market discipline has in some cases broken down, and the incentives to follow prudent lending procedures have, at times, eroded." The proposed rules, he said, aimed to prevent improper lending without "unduly restricting mortgage credit availability."
Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corp., described the rules as "clear, balanced, common-sense standards" and noted that they would apply to brokers and independent lenders rather than just the national banks watched over by U.S. financial regulators.
