WASHINGTON — The Federal Reserve moved Tuesday to protect homebuyers from dubious lending practices, its most sweeping response to a mortgage meltdown that has forced record numbers of people from their homes.
The Fed has been under attack for not doing more to stem the crisis as hundreds of thousands of people lost the roofs over their heads. The situation has raised the chances that the country will fall into recession, unhinged Wall Street, racked up multibillion-dollar losses for financial companies and resulted in political finger-pointing over who was to blame.
The proposed rules, endorsed by the Federal Reserve Board in a 5-0 vote, would crack down on a range of shady lending practices that have burned many of the nation’s “subprime” borrowers — those with spotty credit or low incomes — who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.
“Unfair and deceptive acts and practices hurt not just borrowers and their families but entire communities and, indeed, the economy as a whole. They have no place in our mortgage system,” Fed Chairman Ben Bernanke said.
If ultimately adopted, the plan would apply to new loans made by thousands of lenders of all types, including banks and brokers. It would not cover loans already made.
The proposal would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower’s income.
The plan disappointed both supporters and opponents of tougher home-lending regulations.
By the numbers
4.72%
Portion of the nearly 3 million subprime adjustable-rate loans that entered foreclosure from July through September
18.81%
Subprime ARMs that were past due during the same period
Source: Mortgage Bankers Association
