Fed Forbids 'Liar Loans'; Mortgage Laws Strengthened

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Byline: Patrice Hill, THE WASHINGTON TIMES

The Federal Reserve Board yesterday voted unanimously to ban "liar loans," inflated home appraisals and other abusive practices that led to the housing bubble and today's foreclosure crisis.

In its first major rewrite of consumer-protection laws since the 1970s, the Fed laid down nine tough principles that lenders nationwide must follow, including not only documenting income on subprime loans to eliminate the fraudulent practice of lying about income, but determining whether borrowers can afford loans with ballooning payments and allowing borrowers to refinance loans before the payments reset without penalty.

The Truth in Lending regulations are aimed at eliminating the most dangerous lending practices that led to this year's credit crunch and a looming foreclosure crisis, in which millions of Americans are expected to lose their homes in bank auctions that are driving down the value of homes in neighborhoods from coast to coast.

"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and, indeed, the economy as a whole," said Fed Chairman Ben S. Bernanke. "They have no place in our mortgage system."

The Fed's move took place as the credit crunch that started with this summer's mortgage crisis has grown acute in global markets, forcing the European Central Bank yesterday to pump an unprecedented $500 billion of cash into European money markets to try to bring down lending rates for banks.

Banks, stung by massive mortgage losses, have grown reluctant not only to lend to consumers and businesses, but they are withholding loans from other banks for fear of hidden liabilities.

The massive intervention by the European authorities was aimed at encouraging more bank largess and appeared to buy about a half percentage-point reduction in the London Interbank Offered Rate, a critical measure that governs the cost of funds for banks. The Libor rate fell from 4.95 percent to 4.49 percent yesterday.

"It's beginning to look a bit more desperate, isn't it," said Jonathan Loynes at Capital Economics.

The Fed's rules are aimed at preventing anything like the subprime crisis from recurring by eliminating the loose lending practices that led to massive defaults and foreclosures. It establishes a new category of "higher-priced mortgages" that encompasses subprime loans for people with shaky credit and piggyback loans that borrowers take out to get 100 percent financing of home purchases.

To ensure that borrowers understand how the payments on subprime and other adjustable-rate loans can surge after an introductory low-rate period, the rules require early disclosures of those loan terms to customers before brokers can charge any loan fees. …