By Alison Vekshin
July 14 (Bloomberg) -- The Federal Reserve approved mortgage rules that will require lenders to determine a borrower's ability to repay and tighten other practices that led to the collapse of the U.S. housing market.
The Fed Board of Governors voted today in Washington to require lenders to verify income or assets in weighing repayment ability, and to create an escrow account for property taxes and homeowners' insurance. The regulations also curb penalties for repaying a loan early.
``It seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower,'' Fed Chairman Ben S. Bernanke said today at the meeting.
In taking its biggest supervisory step since Bernanke took office in 2006, the Fed is acting to retain its consumer- protection role. Democrats in Congress blame the central bank for neglecting its authority to protect consumers from unfair mortgage and credit-card lending practices.
Foreclosure filings increased 53 percent in June from a year earlier, with one in 501 U.S. households entering the foreclosure process, RealtyTrac Inc., a seller of default data, reported July 10.
``These changes have made for better rules that will go far in protecting consumers from unfair practices and restoring confidence in our mortgage system,'' Fed Governor Randall Kroszner said.
Prepayment Penalties
The rules ban prepayment penalties on loans whose payments can change during the first four years and limit them to the first two years on other types of subprime mortgages.
Prepayment penalties are fees lenders charge borrowers who pay off their mortgages early, usually to refinance into a less expensive loan. Consumer groups say the fees trap borrowers in mortgages they can't afford to repay. Lenders say the charges let borrowers pay lower interest rates and make mortgage-backed securities more valuable to investors.
The rules won't apply retroactively, said Kathleen Ryan, counsel for the Fed's consumer and community affairs division.
The Fed issued the rules using authority under a 1994 law aimed at protecting consumers in mortgage lending. Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, had repeatedly prodded the Fed to write the new regulations.
