Fed didn't tap subprime powers, action comes late
By Patrick Rucker
WASHINGTON, June 1 (Reuters) - While the Federal Reserve has far-reaching power to control risky subprime loans, it moved slowly to stem the mortgages that have shaken the U.S. home finance sector and any action now will come too late to help today's troubled borrowers.
At issue is enforcement of the Home Ownership and Equity Protection Act, also known as HOEPA, a law that calls on the Fed to set standards for high-cost loans.
Under that statute, the Fed is required to prohibit deceptive and unfair mortgage lending practices. Lawmakers and consumer groups say the regulator shied from its duty when borrowers needed them most.
"For years we asked the Fed to take action but they have just abrogated their responsibility," said Diane Thompson, an attorney with the Land of Lincoln Legal Assistance Foundation, which helps troubled borrowers in Illinois.
Last summer, Thompson told a Fed panel in Chicago that popular subprime loans to borrowers with damaged credit were loaded with dangerous features. She warned, along with other activists, that borrowers were getting loans despite having no proof of income and were approved without regard to whether they could pay annual costs like taxes.
Fed officials got the same message at fact-finding sessions in three other cities last year but took no action under HOEPA.
Activists say the law offers a potent way to curb dangerous subprime loans since it grants the Fed authority to regulate all mortgage lenders, not just banks, credit unions or thrifts. That kind of far-reaching authority is needed, they say, since most subprime loans in recent years were funded by Wall Street.
"HOEPA has the potential to be the most powerful consumer protection tool in the mortgage industry. It gives the Fed almost unlimited authority and the regulator is using almost none of it," said Howard Glaser, an independent mortgage industry analyst in Washington.
Former Fed Governor Susan Bies said that while the Fed did not plunge into the subprime crisis with new rules under HOEPA, it would be unfair to say the central bank was not attentive to the concerns of activists.
Bies, who left the central bank at the end of March, noted that in the last 12 months, the Fed and other bank regulators have developed two sets of guidelines that target the riskiest lending practices that grew popular during the recent housing boom.
"One of the things the Fed has been trying to do is, instead of just rushing out with something, try to run it past the affected parties and get full understanding and input," she said.
Nearly 12 months after its first HOEPA hearing and under pressure from activists and lawmakers, particularly Senate Banking Committee Chairman Christopher Dodd, the Fed is convening a fifth hearing on HOEPA on June 14.
In recent weeks, Fed Chairman Ben Bernanke has said the meeting could lead to new mortgage lending rules.
In a letter to Bernanke in April, Dodd suggested the regulator tighten standards by forcing lenders to build taxes and other year-end fees into monthly payments and stamp out loans to borrowers who cannot prove that they have enough income to make the payments. The Connecticut Democrat, a presidential hopeful, also asked that loans costing more than half of a borrower's income be considered unsafe.
In a speech in mid-May, Bernanke said the Fed will aim to improve disclosure standards, fight deceptive practices and will weigh "all its options under the law."
While lawmakers and consumer groups have welcomed the Fed's initiative, some have said Bernanke and his colleagues are a little late entering the fray.
When a special consumer advisory panel met at the Fed in June, Carolyn Carter of the National Consumer Law Center in Boston told regulators they should interpret HOEPA more broadly.
"I urge the board to take a very serious look ... and consider expanding (HOEPA) to prohibit more of the practices that we're talking about," she said during a discussion attended by Bernanke.
"The Fed has certainly taken a positive step," Carter said of next month's planned-for meeting. "I only wish that they had moved faster."
((Reporting by Patrick Rucker, editing by Chizu Nomiyama; Reuters Messaging: email@example.com; e-mail: firstname.lastname@example.org; +1-202-310-5474)) Keywords: USA SUBPRIME/REGULATION
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