Fed looks to rein in 'liar loans'
At a hearing in Washington, policy makers look for recommendations for curbing abusive lending practices.
NEW YORK (CNNMoney.com) -- The Federal Reserve opened a hearing in Washington today to solicit suggestions on how to curb abusive mortgage lending practices.
Representatives from a wide range of interest groups were scheduled to appear at the hearing, which was chaired by Randall S. Kroszner, a member of the Fed's Board of Governors.
In opening remarks Kroszner said, "The hearing will focus specifically on how the Board might use its rulemaking authority under HOEPA (Home Ownership and Equity Protection Act) to address concerns about abusive mortgage lending practices."
HOEPA, which Congress enacted in 1994, gives the Federal Reserve wide authority in regulating against abusive lending, but Kroszner pointed out that the states can pass their own prohibitions against predatory lending.
Bad loans are contributing to a crisis in home ownership with delinquencies and foreclosures rising steeply this year.
Kroszner also recognized that the mortgage lending transaction is already overburdened with often arcane, legalistic or incomprehensible paperwork that cover disclosures of various kinds.
Therefore, a main goal of the hearing was to gather information in order to craft rules that would curb abusive lending efficiently and effectively.
They would be aimed at four of the most troublesome practices he cited:
These practices are not, in themselves, abusive. Borrowers may, for example, rightly choose a loan with hefty prepayment penalties if that lowers the interest rates on their loans. The problems arise when loan originators apply these provisions indiscriminately or with predatory intent.