Federal regulators prepare to tighten mortgage rules

In California, Gov. Schwarzenegger signs a bill requiring an early warning on problem loans.

By Maura Reynolds, Los Angeles Times Staff Writer
July 9, 2008

WASHINGTON -- With a foreclosure rescue bill facing an uncertain fate in Congress, federal regulators are putting the final touches on new rules designed to curb irresponsible mortgage lending and help some struggling homeowners refinance into more affordable loans.

On Monday, the Federal Reserve is expected to require lenders to document borrowers' incomes and verify that they can afford their mortgage payments -- including the higher payments that come when adjustable-rate loans reset.                  

"These new rules, which will apply to all lenders and not just banks, will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending," Federal Reserve Chairman Ben S. Bernanke said at a conference Tuesday.

First proposed in December, the measures have been revised in recent months in response to public comment. Fed officials declined to describe the changes, but the regulations also are expected to limit bonuses paid to brokers for making subprime loans and restrict prepayment penalties for borrowers who want to refinance.

Although action from the Fed is imminent, Congress remains divided over how to stem rising foreclosures and deal with escalating costs to neighborhoods and communities.

Congressional efforts are focused on making it easier for borrowers to refinance into more-affordable loans. The Senate is expected to pass its version of a foreclosure prevention bill in coming days, but it differs from a bill already adopted by the House when it comes to specifics including how much relief would be doled out to communities ravaged by foreclosures, and how such relief would be funded.