WASHINGTON -- Federal Reserve Board Governor Randall Kroszner said on Thursday the Fed will carefully consider objections to proposed consumer protection rules for subprime mortgages, but argued the rules could help restore confidence in the mortgage market.
In prepared remarks to the National Association of Hispanic Real Estate Professionals in Washington, Kroszner said the rules, open for public comments until April 8, are targeted at loans that carry a higher interest rate.
They will mainly cover subprime loans aimed at borrowers with poor credit records and the riskier end of the near-prime segment known as "Alt-A", he said.
"We anticipate vigorous public comment on this proposal, and once we have carefully considered all the input we receive, we will move expeditiously to a final rule," Kroszner said. "Effective consumer protection can help to restore confidence in the mortgage markets and help to preserve the flow of capital to consumers who wish to purchase a home."
His prepared remarks did not touch on the central bank's monetary policy or the broader U.S. economic outlook.
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He said some in the mortgage industry have expressed concerns that in the current market environment, using an interest-rate trigger for the rules could cover the market too broadly.
"We will carefully consider the issues they raise and other possible approaches to achieve our objective." he said.
Under the Fed's proposal, a "higher-priced mortgage loan" would be one that has an annual percentage rate that exceeds the yield on comparable Treasury securities by three or more percentage points for first-lien loans, or five or more percentage points for subordinate loans.
He said a key change under the rules is the emphasis on verification of a borrower's repayment ability.
"The regulations would prohibit a lender from engaging in a pattern or practice of making higher-priced loans based on the value of the borrower's house rather than on the borrower's ability to repay from income, or from assets other than the house," he said.
The proposal does not prescribe quantitative underwriting requirements but prohibits a "pattern or practice" of disregarding the ratio of applicants income to debt.
It also proposes a ban on prepayment penalties in circumstances of high risks to consumers. Such penalties were helpful for mortgage lenders who sold and securitized subprime loans in recent years because investors believed they were less likely to be refinanced into lower-interest-rate loans.
Kroszner also said it was important for mortgage lenders, servicers, investors and trade groups to quickly adopt "fast-track" measures to modify loan terms and avoid foreclosures for troubled borrowers.
"Challenges remain, for example, with respect to ongoing constraints on servicing capacity to expedite work outs," he said. "Servicers must undertake the investment to overcome the capacity challenges and provide transparent and timely measures of the results."
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