Financial Update (Fourth Quarter 2007)

Fed Governor Kroszner Discusses Mortgage Practices With Congress

Randall KrosznerPromoting access to credit and fostering sustainable homeownership are important objectives for the Federal Reserve, and the Fed's Board of Governors believes that responsible subprime mortgage lending can further both goals. Federal Reserve Governor Randall S. Kroszner discussed various legislative proposals to reform mortgage practices in testimony before the House Committee on Financial Services on Oct. 24.

Sorting out subprimes
Kroszner said in his testimony that the Fed has observed the distress that delinquencies and foreclosures have created for homeowners and communities. "Keeping families in their homes is a matter of great importance to the Federal Reserve," he said. "In fact, the 12 Federal Reserve Banks are working closely around the country with community and industry groups dedicated to reducing homeowners' risks of foreclosure."

The Board responds to the subprime shakeout
The Federal Reserve has primary rule-writing authority for many consumer protection laws. Kroszner said the Fed's approach to consumer protection is twofold: a focus on providing information needed to make good decisions and the development and enforcement of rules against abusive practices.

Transcript of testimony off-site image
Governor Kroszner bio off-site image
Consumer information about checks off-site image

"The Board believes it is extremely important to strike the right balance by seeking to protect consumers from predatory lending practices without restricting credit from responsible lenders to borrowers with shorter or lower-rated credit histories," he said.

Kroszner outlined several proposals by the Federal Reserve that he said would help consumers make informed decisions and lenders adhere to responsible practices, including

  • improvements to rules governing the disclosure of mortgage loan terms and conditions;
  • changes to the Truth in Lending Act rules to address concerns about incomplete or misleading mortgage loan advertisements and solicitations;
  • the use of rulemaking authority under the Home Ownership and Equity Protection Act to address unfair or deceptive mortgage lending practices; and
  • a project launched with other federal and state agencies to review nondepository lenders with significant subprime mortgage operations.

Legislative responses to subprime turmoil
Kroszner discussed the Mortgage Reform and Anti-Predatory Lending Act of 2007, which if enacted into law would require licensing and registration of mortgage brokers and bank loan officers, create a federal standard for ensuring that borrowers have a reasonable likelihood of being able to repay their loans, and impose some liability on entities that securitize loans.

He commended the act's proposed increased oversight and regulation of brokers, calling it "an approach that has merit." He also lauded the act's emphasis on considering a borrower's ability to repay a loan. "The Board firmly believes that lenders should give due consideration to a borrower's ability to repay a loan before the loan is extended," he said.

October 31, 2007