Fed moves on home-loan crisis

WASHINGTON - The Federal Reserve moved yesterday to impose tough new restrictions meant to curb unfair and deceptive home-lending practices and prevent a recurrence of this year's meltdown in subprime mortgages.

By a 5-0 vote, the Fed approved a plan that would tighten provisions meant to protect borrowers and apply them to a far larger share of home loans - whether from banks, mortgage companies or other lenders - than under current regulations.

The proposed rules underscore the more assertive role the Fed is now prepared to take in regulating lending, in a big shift from the central bank's approach in the past.

In general, the rules are meant to deter unscrupulous lenders from persuading people that they can afford loans that ought to be out of their reach. By extension, the rules are also intended to keep would-be buyers from deceiving themselves about the debt burdens they can shoulder.

"Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," the Fed's chairman, Ben S. Bernanke, said. "We want consumers to make decisions about home-mortgage options confidently, with assurances that unscrupulous home-mortgage practices will not be tolerated."

The plan includes provisions that would require more extensive disclosures, restrict advertising and make it harder to lend to borrowers with little or no documentation and a questionable ability to repay. It would also allow borrowers, in some circumstances, to sue lenders who violate the rules.

The Fed acted under provisions of the Truth in Lending Act and the Home Ownership Equity Protection Act of 1994. In the past it had been quite cautious about using its authority to clamp down, and the rules had last been revised in 2001.

Details of the proposed rules, which could take effect next year after a period for public comment and possible revisions, can be read on the Fed's Web site, www.federalreserve.gov.

The action puts the Fed a step ahead of Congress, which is considering its own steps to tighten restrictions on the home loan industry. A bill put forward by Rep. Barney Frank, D-Mass., chairman of the House Banking Committee, would expose mortgage brokers and lenders to legal liability if borrowers can't repay.

The Fed did not go as far as proposals by some consumer groups, which sought, for example, an outright ban on prepayment penalities.

What the Fed has been hearing in recent months is a complex blend of personal hardship and dire news for the nation as a whole, as waves of foreclosures have swamped the housing market and threatened to mire the economy in a recession. The housing boom of the first several years of the decade seems almost as distant as the boom in technology stocks, but economists have warned that the fallout from the housing slump could be much worse than that from the "dot com" bubble.

Many home-buyers whose little slice of the American dream has turned into a nightmare were undone by "teaser rates" dangled in front of "balloon mortgages." When the tempting original rates were supplanted by much higher rates built into the loan, many homeowners could not make the monthly payments.

But those personal misfortunes have mushroomed into a national problem, further complicated by the packaging and reselling of mortgages in ways that are so arcane that even some bankers are befuddled by them. *