US bill would help regulators stop deceptive loans

By John Poirier

WASHINGTON, Sept 18 (Reuters) - Legislation that would give two U.S. banking and credit union regulators more power to police unfair and deceptive practices, including those used by some subprime mortgage lenders, was approved on Tuesday by the House Financial Services Committee.

Under the bill, the Office of the Comptroller of the Currency, which regulates national banks, and the Federal Deposit Insurance Corporation, which oversees many state banks, could write regulations aimed at stopping deceptive advertising.

Current law already gives the Federal Reserve and Federal Home Loan Bank Board the authority to determine unscrupulous practices in selling financial products to consumers.

Another U.S. banking regulator, the Office of Thrift Supervision, has consumer protection authority.

"There's a vacuum," said committee chairman Barney Frank, referring to the inability of the OCC and FDIC to regulate deceptive practices. Frank is a Massachusetts Democrat.

The bill may be considered by the full House of Representatives as soon as October, Frank said.

The House committee adopted the bill in part to rein in the aggressive advertising of low introductory rates and terms offered by some lenders for subprime mortgages to less creditworthy borrowers. A sharp rise in defaults on the mortgages, which were typically repackaged and sold on Wall Street, has unleashed chaos in the global financial market.

Many of the subprime loans have rates that escalate or "reset" after an introductory period, which critics say take unfair advantage of low-income borrowers.

However, many subprime brokers and lenders fall outside of the supervision of federal regulators like the OCC or the FDIC.

The bill also attempts to address eroding state consumer protection laws after a Supreme Court decision on federal preemption by giving other federal regulators more powers.

The American Bankers Association trade group backed the bill. Floyd Stoner, an ABA executive director, said, "We support the legislation and it works well and we are pleased because of its joint authority."

Frank said the new bill reflected the views of the late former Federal Governor Ed Gramlich, who warned early about the need to tighten oversight of higher-risk mortgage lending.

At a June hearing, the heads of the OCC and FDIC told lawmakers they lacked the authority to determine "unfair and deceptive practices" by lenders. Frank criticized the Fed at that time for failing to use its existing consumer protection power.

Frank also criticized former Fed chief Alan Greenspan for being unwilling to act to slow the growth of subprime mortgages.

"He was wrong not to have tried to do some regulation," Frank told reporters after the committee's bill-writing session. "He acts as if regulation was not an option."