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US: Fed battles lax lenders

Jaimie Kanwar

New rules have been instituted to protect US consumers from unscrupulous lenders.

The US Federal Reserve has brought in rules to give home buyers added protection from the irresponsible lending that has hit sub-prime borrowers.

The central bank approved a plan in the face of increasing mortgage delinquencies and foreclosures.

For all mortgages, the plan would:

- Require advertising to contain facts about rates, monthly payments and other loan features.

- Bar lenders from making loans without proof of a borrower's income

- Require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.

- Restrict lenders from penalizing risky borrowers who pay loans off early.

- Prohibit lenders from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value.

Other practices would also be clamped down on by the rules, which cover new loans made by thousands of lenders, including banks and brokers, but not existing loans.

Lenders also have to credit a mortgage payment to the homeowner's account on the day it is received.

Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business, commented: "Clearly this is closing the barn door after the fact, but this is a very important move and absolutely will make a difference going forward."