Fed steps in to protect home loan borrowers

WASHINGTON: Lenders would have to confirm that a borrower can afford a mortgage before making the loan under protections proposed by the Federal Reserve on Tuesday following the havoc wrought by the US subprime loan crisis.

The proposals are intended to replace loose standards that have put many Americans at risk of losing their homes because they took out loans they could not afford and may not have fully understood.

The new rules will not assist today’s struggling homeowners but would give consumers the right to sue mortgage lenders who act unfairly and deceptively in preparing loans. Millions of Americans who stretched to buy homes in recent years face the risk of foreclosure as mortgages with initial “starter” rates reset sharply higher.

The Fed’s board unanimously approved the standards recommended by its consumer rights staff and said they strike a balance by protecting consumers while preserving their access to credit.

“These new rules, once adopted, would apply to all mortgage lenders,” Fed Chairman Ben Bernanke said as the board met to consider the proposal. He said the rules would be “consistently applied and vigorously enforced” by state and federal regulators.

The new rules would put the nation’s 50,000 mortgage brokers under some federal supervision, according to Fed staff. The proposal was criticised by several leading lawmakers and praised by an industry group. The Fed has been faulted for failing to use all its consumer protection authority during the housing boom that ended in 2005.