June 30, 2007

Regulators set new sub-prime loan standards

WASHINGTON - BANK regulators in the United States issued new standards for subprime mortgage lending yesterday that include several new consumer protections.

Sub-prime borrowers should not be penalised for refinancing out of a mortgage before the interest rate resets to a higher level, according to a statement of principles issued by the regulators.

The guidelines also call for lenders to warn borrowers when a reset is coming and grant them at least 60 days to refinance.

'This guidance...underscores that the Federal Reserve and other banking regulators expect lenders to make sure sub-prime borrowers not only can afford their monthly payments while the introductory rate is in effect but also after the interest rate resets,' Federal Reserve Board governor Randall Kroszner said in a statement.

Lenders should only offer loans to borrowers with little proof of assets and income if there is other evidence that they can repay, the statement says.

The guidance, which the lending industry takes as binding, was issued by the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp, the Office of Thrift Supervision and the National Credit Union Administration.

The sub-prime crisis led two Bear Stearns hedge funds to the brink of collapse and prompted at least 50 mortgage companies to halt business or put themselves up for sale. The Fed's efforts may not satisfy lawmakers, who want regulators to write new rules instead of unenforceable guidelines.

'No homeowner can use this to protect herself,' said Alys Cohen, a Washington-based attorney for the National Consumer Law Centre. 'It doesn't prohibit loans that can be made without income verification. They should be banned, and guidance doesn't do things like that.'

Senate banking committee chairman Christopher Dodd, a Connecticut democrat, and House financial services committee chairman Barney Frank, a Massachusetts Democrat, have said regulators shirked their responsibility to protect consumers from abusive lending during the housing boom.

Mr Dodd, in an April letter, challenged Fed chairman Ben Bernanke to draft 'bright line' regulations governing lending practices.

Fraud increased and lending standards fell as Americans borrowed US$2.8 trillion (S$4.3 trillion) for home loans from 2004 to 2006, the largest mortgage boom of any three-year period on record.

The banking regulators' guidelines may have a limited effect, because about 70 per cent of loans are issued by mortgage brokers, who are regulated by the states, said Mr John Taylor, president of the Washington-based National Community Reinvestment Coalition.

'Good intentions, guidance and best practices are all nice things,' he said. 'The problem is that brokers are going to do what gives them the highest fee and doesn't break the law.'