Mortgage-lending practices to be reviewed

DURHAM -- Federal Reserve Governor Randall Kroszner said the Fed will review the mortgage-lending practices of the nonbank subsidiaries of banks after standards dropped during the housing boom that ended last year.

The review will examine lenders' "compliance with a number of regulations," Kroszner said today at the National Bankers Association convention in Durham.

The statement shows the Fed, under Chairman Ben S. Bernanke, has overcome both political and legal doubts about its authority to inspect nonbank units. Former Chairman Alan Greenspan didn't take action on a previous proposal to do so by former Fed governor Edward Gramlich because he didn't think it would be effective. The Fed's inaction left the subsidiaries under the less comprehensive supervisory powers of states.

Kroszner didn't comment on the outlook for the economy or interest rates in his remarks, while noting the central bank cut its benchmark rate last month to help reduce risks to the economy from tightening credit markets.

Responding to a question after his speech, he said that strong world demand has boosted commodity prices, creating "potential inflationary pressures going forward."

The Fed has been blasted by lawmakers including the heads of the House and Senate committees that oversee the central bank for not doing enough to protect consumers. Lax lending practices and abuses caused the subprime mortgage-market to collapse, lawmakers, analysts and consumer advocates say.

Kroszner reiterated that the central bank plans to unveil new rules on mortgage lending this year. Areas that may be addressed include the prepayment penalties on subprime mortgages and the writing of loans "without regard to the borrowers' ability to repay," he said.

He added that the Fed plans to propose rule changes to address misleading mortgage loan ads and solicitations.

Kroszner, a former University of Chicago economics professor, heads the Fed Board's bank supervision and consumer affairs committees. He replaced Susan Bies, who left the central bank in March, as the Board of Governor's chief liaison with the banking industry.

The Federal Open Market Committee lowered the target rate for overnight loans between banks by half a point on Sept. 18, to 4.75 percent, more than most economists forecast. The FOMC next meets Oct. 30-31.

"We judged that a 50 basis-point lowering of the target federal funds rate was appropriate to offset the effects of tighter financial conditions on the economic outlook," Kroszner said today.