The Federal Reserve will propose new rules to combat unfair or deceptive mortgage lending practices later this year, Chairman Ben Bernanke told members of the House Financial Services Committee Wednesday.
Bernanke’s announcement that the Fed will exercise its rule-making authority under the Home Ownership and Equity Protection Act (HOEPA) marks a departure from an emphasis on tighter guidelines for lenders and improved disclosures for borrowers.
In his prepared remarks to lawmakers, Bernanke noted federal regulators have already improved disclosures for adjustable-rate mortgages, requiring better explanations of risks like payment shock and negative amortization. And by the end of the year, he said, the Federal Reserve will propose changes to Truth in Lending Act rules governing incomplete or misleading claims in mortgage loan advertisements.
“We are certainly aware, however, that disclosure alone may not be sufficient to protect consumers,” Bernanke said. “Accordingly, we plan to exercise our authority under the Home Ownership and Equity Protection Act (HOEPA) to address specific practices that are unfair or deceptive.”
The new rules will draw on discussion of industry practices at a June 14 public hearing, Bernanke said, including those pertaining to prepayment penalties, the use of escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the evaluation of a borrower’s ability to repay.
“The discussion and ideas we heard were extremely useful, and we look forward to receiving additional public comments in coming weeks,” Bernanke said. “Based on the information we are gathering, I expect that the (Federal Reserve) Board will propose additional rules under HOEPA later this year.”
The Fed chairman, who has faced criticism from some lawmakers that the Federal Reserve did not do enough to police lenders during the housing boom, said that while regulators want to preserve access to credit, underwriting standards were at times lax.
“Promoting access to credit and to home ownership are important objectives, and responsible subprime mortgage lending can help advance both goals,” Bernanke said. “In designing regulations, policymakers should seek to preserve those benefits. That said, the recent rapid expansion of the subprime market was clearly accompanied by deterioration in underwriting standards and, in some cases, by abusive lending practices and outright fraud.”
Rising delinquencies and foreclosures, he said, “are creating personal, economic, and social distress for many homeowners and communities — problems that likely will get worse before they get better.”
Bernanke’s promise of new HOEPA rules followed Tuesday’s announcement that federal regulators will coordinate with state agencies to investigate the underwriting and risk-management practices of subprime lenders under their jurisdictions.