Two mortgage industry groups have weighed in on the new mortgage regulations proposed earlier this week by the Federal Reserve Board of Governors (FRB.)

The first, a major critic of regulatory efforts to end predatory lending, was critical of the proposed regulatory changes announced by the FRB on Tuesday. The other, The Mortgage Bankers Association (MBA) released favorable comments about a couple of aspects of the rules, albeit praising faintly.

Calling the proposed rules "another missed opportunity for the agency to rein in practices that have hurt millions of American families," the Center for Responsible Lending criticized the FRB for failing to eliminate the root causes of the looming foreclosure crisis, instead endorsing rules that "are riddled with loopholes" permitting "many dangerous subprime lending practices to stand."



The Center, in a press release specifically criticized the FRB's regulations in the following areas:

Prepayment penalties. The Fed appeared to restrict prepayment penalties only by way of a requirement that they must expire at least 60 days before an interest rate reset, allowing borrowers to seek an affordable refinance before their payments increase. The Center stated that, "Rather than banning this 'exit tax' on all subprime loans, the FRB only limits penalties slightly on adjustable-rate mortgages, and otherwise allows prepayment penalties to remain effective for five full years, with no limit on their size."

Yield-spread premiums. The Fed's proposed rule leaves yield-spread premiums intact by simply requiring written disclosure of these incentives to mortgage brokers to sign up borrowers for higher interest loans when they might qualify for a less expensive loan. Unscrupulous lenders can easily bury these disclosures among the myriad disclosures and paperwork already required.

Ability to repay. Here we quote the Center's statement in its entirety.

"The current mortgage crisis is largely due to lenders making loans to families without ensuring that the borrowers can afford them. The FRB is proposing rules they have previously issued in regulatory guidance to depository lenders, but they have made this rule virtually meaningless for most subprime lenders since the rule will not be enforceable. Victims will be required to show that the lender made unaffordable loans not only to him or her, but also in a "pattern or practice" to other borrowers-a standard of proof that makes it very difficult to win a case even when violations have been flagrant. The FRB acknowledged this very point in a report to Congress in 1998, when it said: "As a practical matter, because individual consumers cannot easily obtain evidence about other loan transactions, it would be very difficult for them to prove that a creditor has engaged in a 'pattern or practice' of making loans without regard to homeowners' income and repayment ability." Further, even this weak standard does not apply to non-traditional loans such as payment option ARMs.

The Center was more kind to other aspects of the proposed regulations.

Verification of income. The Center stated that the new rules represent a step forward by addressing the lack of income documentation that has caused significant payment problems on subprime loans, but this should have been extended to non-traditional mortgages when a borrower could easily provide proof of income.

Escrow of taxes and insurance. The center applauded a requirement to force lenders to escrow taxes and insurance rather than taking those annual payments off of the table as a visible component of monthly homeowner expenses. However, the Center expressed concern that the escrow rule would not also apply to non-traditional mortgages such as payment option ARMs. It also feels that the fact that there is a one year opt out will reduce the rule's effectiveness.

The Mortgage Bankers Association praised the FRB's action saying that the proposed rules "strive to strike the balance between ridding the marketplace of abusive lending practices, while still preserving credit opportunities for worthy borrowers.

MBA concentrated on the disclosure portion of the rules saying that it had long supported better and timelier disclosures to consumers but that it was concerned that some of the restrictions in the proposals may unnecessarily limit credit options for borrowers.

Both organizations expressed their determination to testify about the regulations during the required 90-day comment period before the Federal Reserve Board of Governors votes a second time.