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.