Fed to curb shady home-lending practices
WASHINGTON (AP) - July 8, 2008 Fed Chairman Ben Bernanke spoke of the much-awaited rules in a
broader speech Tuesday about the challenges confronting
policymakers in trying to stabilize a shaky U.S. financial system.
To that end, Bernanke said the Fed may give squeezed Wall Street
firms more time to tap the central bank's emergency loan program.
To prevent a repeat of the current mortgage mess, Bernanke said
the Fed will adopt rules cracking down on a range of shady lending
practices that has burned many of the nation's riskiest
"subprime" borrowers - those with spotty credit or low incomes -
who were hardest hit by the housing and credit debacles.
The plan, which will be voted on at a Fed board meeting on
Monday, would apply to new loans made by thousands of lenders of
all types, including banks and brokers.
Under the proposal unveiled last December, the rules 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. It also would prohibit
lenders from engaging in a pattern or practice of lending without
considering a borrower's ability to repay a home loan from sources
other than the home's value.
"These new rules ... will address some of the problems that
have surfaced in recent years in mortgage lending, especially
high-cost mortgage lending," Bernanke said.
Consumer groups have complained that the proposed rules aren't
strong enough, while mortgage lenders worry that they are too tough
and could crimp customers' choices.
In an extraordinary action aimed at averting a financial
catastrophe, the Fed in March agreed to let investment houses go to
the Fed - on a temporary basis - for a quick, overnight source of
cash. Those loan privileges, which are supposed to last through
mid-September, are similar to those permanently afforded to
commercial banks for years.
"We are currently monitoring developments in financial markets
closely and considering several options, including extending the
duration of our facilities for primary dealers beyond year-end
should the current unusual and exigent circumstances continue to
prevail in dealer funding markets," Bernanke said in prepared
remarks to a mortgage-lending forum in Arlington, Va.
The Fed's decision to act - temporarily at least - as a lender
of last resort for Wall Street firms was made after a run on Bear
Stearns pushed the investment bank to the brink of bankruptcy and
raised fears that others might be in jeopardy. It was the broadest
use of the Fed's lending powers since the 1930s.
Bear Stearns was eventually taken over by JPMorgan Chase & Co.,
with the Fed providing $28.82 billion in financial backing.
Those controversial decisions have drawn criticism from
Democrats in Congress and elsewhere that the Fed is bailing out
Wall Street and putting billions of taxpayer dollars at risk.
Bernanke, in appearances on Capitol Hill has said he doesn't
believe taxpayers will suffer any losses.
In his speech Tuesday, the Fed chief defended those actions
anew. If the Fed didn't intervene, he said, problems in financial
markets would have snowballed, imperiling the country.
"Allowing Bear Stearns to fail so abruptly at a time when the
financial markets were already under considerable stress would
likely have had extremely adverse implications for the financial
system and for the broader economy," Bernanke said to the mortgage
forum, organized by the Federal Deposit Insurance Corp.
The Fed's consideration of giving Wall Street firms more time to
tap the Fed's emergency loan program is part of an ongoing effort
by the central bank to bring back stability to fragile financial
markets and help to bolster shaky confidence on the part of
investors.
Policymakers - in the White House, in Congress and other federal
agencies - will need to work together to come up with ways to make
the U.S. financial system more resilient and stable and to prevent
a repeat of the types of problems that brought about the end of
Bear Stearns, an 85-year-old institution, Bernanke said.
Although those efforts are already under way and will be the
focus of a House Financial Services Committee hearing Thursday, it
will fall to the next president and next Congress to settle them.
Both Bernanke and Treasury Secretary Henry Paulson are scheduled to
testify at Thursday's hearing.
The Bush administration has proposed revamping the nation's
financial regulatory structure. That plan would make the Fed an
ubercop in charge of financial market stability. But the Fed would
lose daily supervision of big banks. Bernanke said the Fed must
maintain this power if it is to be an effective overseer of
financial stability.
The Fed, which regulates banks, and the Securities and Exchange
Commission, which oversees investment firms, announced an
information-sharing agreement on Monday aimed at better detecting
potential risks to the financial system.
Over the longer term, though, Congress may need to adopt
legislation to bolster supervision of investment banks and other
large securities dealers, Bernanke said.
Bernanke recommended that Congress give a regulator the
authority to set standards for capital, liquidity holdings and risk
management practices for the holding companies of the major
investment banks. Currently, the SEC's oversight of these holding
companies is based on a voluntary agreement between the SEC and
those firms.