US Regulators Unveil Plan to Revamp Mortgage Rules

By Glenn Somerville

WASHINGTON (Reuters) - U.S. financial regulators pledged on Thursday to toughen rules for mortgage brokers, lenders, and credit agencies, to try to restore investor confidence and prevent a recurrence of credit-market problems that threaten to slow the economy.

U.S. Treasury Secretary Henry Paulson, unveiling a 20-page set of recommendations from the top-level President's Working Group on Financial Markets, blamed a "dramatic weakening" of underwriting standards for lower-quality home loans that have trigged turmoil in credit markets around the globe.

Paulson, a Wall Street veteran who took the reins at Treasury in mid-2006, said "financial innovation," like the practice of slicing up and repackaging so-called subprime mortgages for sale worldwide, had worsened the situation by introducing a baffling level of complexity.

Speaking at the National Press Club in Washington D.C., Paulson appealed to banks and other lenders not to stop issuing the loans that are the lifeblood of the economy and implied they should reduce dividends paid to shareholders if necessary to raise capital.

"We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth," he said.

Among other items, the regulators recommended "strong nationwide licensing standards" for mortgage brokers, stiffer federal and state oversight of all mortgage originators, and new rules to force more disclosure of loan terms to borrowers.

Analysts said the proposed changes, which touch nearly every corner of the credit market, from Wall Street firms to credit rating agencies to regulators, come too late to forestall a wave of foreclosures sweeping the country. Some suggested brokers in particular needed more scrutiny.

"Mortgage brokers need to have some skin in the game, so that if they defraud borrowers, the brokers are worth suing," said Kurt Eggert, a law professor at Chapman University in Orange, California.