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Fed urged to get tougher on credit

Consumer advocates want stricter lending rules to curb abusive practices and ensure borrowers can repay.

June 15, 2007|From Bloomberg News

WASHINGTON — Consumer advocates Thursday called on the Federal Reserve to write stricter rules to end abusive lending practices, saying the central bank had not acted forcefully enough to prevent delinquencies and foreclosures.

The advocates spoke at a hearing the Fed held in response to criticism from Congress that the central bank wasn't doing enough to protect consumers. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, threatened Wednesday to strip the Fed of its power to write consumer protection rules, telling Randall Kroszner, a member of the Fed's board of governors, "Use it or lose it."

At Thursday's hearing, Kroszner said the agency would seriously consider tougher rules. But he also warned that the Fed "must walk a fine line" and be careful not to restrict consumers' access to credit.

State officials and consumer advocates recommended that the Fed write rules that would require lenders to ensure a borrower's ability to repay.

"Common sense tells us that if you take out a loan, you should have the ability to pay," Iowa Atty. Gen. Tom Miller said.

State officials also encouraged restrictions on loans that don't require verification of a borrower's stated income, saying lenders were using them to steer borrowers into higher-priced mortgages.

"Borrowers could get a fixed-rate loan at a lower cost if they brought documentation," said Mark Pearce, North Carolina's deputy commissioner of banks. "Stated-income loans are just invitations for fraud."

Industry representatives defended some of the practices the Fed is considering restricting, including prepayment penalties and stated-income loans. Curbing such loan features could reduce the ability of many people to obtain mortgages, the industry speakers said.

The lenders, including JPMorgan Chase & Co. and Option One Mortgage Corp., urged the Fed to require simpler consumer disclosures and to issue guidelines instead of rules.

"We recommend that the board be cautious," said Faith Schwartz, senior vice president at Irvine-based Option One, a unit of H&R Block Inc.

The Fed has broad rule-writing powers over all financial institutions regarding disclosure and abusive lending. Other regulators, including states, have enforcement authority because the Fed directly supervises only a few hundred banks.

The Fed, the Federal Deposit Insurance Corp. and other bank regulators are already writing supervisory guidelines on sub-prime mortgage lending. The guidelines, proposed in March, are expected to direct lenders to clarify loan risks and ensure that borrowers can make payments at the highest interest rate.

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