Lawmakers, FDIC seek predatory lending crackdown

By Kevin Drawbaugh

WASHINGTON (Reuters) - A top U.S. bank regulator and lawmakers in Congress from both parties called for a national crackdown on predatory lending, a main cause of the crisis in the subprime mortgage market.

"The time has come for national anti-predatory lending standards applicable to all mortgage lenders," Federal Deposit Insurance Corp. Chairman Sheila Bair told a House of Representatives subcommittee in a hearing on Tuesday.

Bair said Congress could require that mortgage lenders must take into account a borrower's ability to repay a loan at its true cost, not based only on initial, low payments, while also moving against confusing and misleading mortgage marketing.

She also suggested possible restrictions on loan flipping, prepayment penalties, escrow of taxes and insurance and the fiduciary obligations of mortgage brokers.

Alabama's Spencer Bachus, senior Republican on the House Financial Services Committee, of which the subcommittee is a part, said: "We still need ... some legislation addressing mortgage brokers ... some type of national standard."

"We are facing, by all accounts, a tsunami of defaults and foreclosures," New York Democratic Rep. Carolyn Maloney, who chaired the hearing, said, citing estimates that 2.2 million subprime borrowers could lose their homes.

Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, said earlier this month he wants to pass a bill by the end of the year to curtail predatory lending. Connecticut Democratic Sen. Christopher Dodd is also planning to introduce anti-predatory lending legislation.

Others appearing before the subcommittee were less definite on where they stand. A Federal Reserve staffer warned against over-reaction to problems that "need to be addressed in a way that preserves incentives for responsible subprime lenders."

Fed Consumer and Community Affairs Division Director Sandra Braunstein said: "At this time we don't see a need to ask Congress for additional authority or additional legislation."

John Reich, director of the Office of Thrift Supervision, said "The market is in the process of correcting itself."

Congress and America's patchwork of banking regulators are groping toward a policy response to rising mortgage defaults and foreclosures in the subprime mortgage market.

Michael Calhoun, president of the Center for Responsible Lending, said in prepared remarks to be delivered to the panel: "Federal law governing abusive lending practices is severely outdated, leaving consumers with scant protections."

Calhoun told the House financial institutions and consumer credit subcommittee that subprime losses could be "the worst disaster in the mortgage market since the Great Depression."

Subprime lending emerged in recent years to lend money at high interest rates for home purchases to people with poor credit. The business boomed in a super-heated real estate market, when home values seemed to go nowhere but up.

One result of the spread of adjustable-rate mortgages (ARMs) and other new loans was that more people could buy their own homes. The Fed encouraged this, while it also steadily hiked interest rates. Now the real estate bubble has burst.