Fed to propose changes to mortgage rules next week

WASHINGTON (Reuters) - The Federal Reserve said on Tuesday it will hold a meeting next week to propose changes to mortgage regulations in an attempt to address unfair and deceptive lending practices.

The meeting, to be held next Tuesday, comes at a time when the Fed has been criticized for failing to use its authority under the Home Ownership and Equity Protection Act to help home loan borrowers with poor credit histories.

The Fed will likely propose limiting prepayment penalties for those subprime mortgages during the starter rate of hybrid loans such as adjustable rate mortgages, sources familiar with the matter said.

One source said the Fed might propose giving borrowers a notice of 60 days to refinance mortgages before the interest rates reset.

Other proposals are expected to center on whether banks can provide mortgages based on little or no documentation on salaries and assets, a borrower's ability to repay, as well as escrow and insurance.

The Fed is expected to give the public between 60 days and 90 days to comment on the proposals, which are not expected to assign any liability on the secondary mortgage market, according to the source.

Christopher Dodd, chairman of the Senate Banking Committee, is expected to introduce his own mortgage reform legislation aimed at giving mortgage fraud victims the right to sue lenders, brokers and investors.

The legislation will also hold lenders responsible for flawed loans and appraisers responsible for improperly weighing the value of a property.

Lawmakers are not likely to take up Dodd's bill until they return to Washington next year.

In November, the U.S. House of Representatives voted to regulate mortgage brokers in a move aimed at targeting loose and deceptive loan practices that helped inflate the housing bubble.

The House bill calls for licensing of mortgage brokers and bank loan officers, bans certain predatory lending practices and bolsters borrower protections.

The Dodd legislation targets expensive subprime loans traditionally aimed at borrowers with weak credit but that were also popular among borrowers who saw it as an easy way to hop into the market or refinance during the housing boom.

Among other steps, the Dodd legislation would allow the Federal Reserve to regulate more high-cost loans under HOEPA rules.

Dodd, a candidate for the Democratic presidential nomination, has chastised the Fed for loose enforcement of HOEPA during a five-year run-up in home prices that ran out of steam in 2005 and ended in 2006.

The aim of the legislation is to align the interests of borrowers and the mortgage lending industry after years of a runaway housing market, the staffer, who asked not to be identified, said.

(Additional reporting by Patrick Rucker; Editing by James Dalgleish)