Fed may crack down on abusive mortgage practices

WASHINGTON - The Federal Reserve is considering tougher rules to crack down on abusive practices by mortgage lenders, Fed Chairman Ben S. Bernanke said yesterday.

But he predicted that the economy would escape without significant harm from the problems in the subprime market.

Facing criticism from members of Congress about lax regulation, Bernanke said the Fed was reviewing such options as bolstering disclosure requirements on what lenders must tell prospective borrowers and writing tougher rules to guard against fraud.

"We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers," Bernanke said in a speech to a banking conference in Chicago.

Bernanke, who was President Bush's chief economic adviser before taking over the Fed post in February 2006, said regulators needed to be sure that any rules they imposed did not stifle the market for legitimate loans.

"In deciding what actions to take, regulators must walk a fine line," he said. "We must do what we can to prevent abuses or bad practices, but, at the same time, we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers."

He said that, while it was likely there would be further increases in mortgage delinquencies and foreclosures this year and in 2008, he did not believe the problems would be enough to derail the overall economy.

Bernanke's comments represented his most extensive review of the troubles in the subprime market since the Fed and other banking regulators came under criticism from members of Congress earlier this year. The lawmakers said the regulators were not doing enough to halt abusive practices in the subprime market, which provides loans to people with weak credit histories.

Problems with subprime loans have roiled financial markets and raised concerns about their possibly spilling over and affecting the entire economy.

One major worry was a potentially more severe downturn in housing if significant numbers of homes got dumped back on the market because borrowers could not meet adjustable-mortgage payments that were resetting at higher levels.

Senate Banking Committee Chairman Christopher Dodd (D., Conn.), who earlier called the entire episode a "chronology of regulatory neglect," welcomed an announcement by Bernanke that the Fed would hold hearings.