Fed chief urges loan awareness

With the explosion of financial choices, consumers must continually sharpen their assessments of whether certain mortgages or other investment products make sense for them, Federal Reserve Chairman Ben S. Bernanke recommended Wednesday.

“Some evidence, including recent Federal Reserve research on consumers holding adjustable-rate mortgages, suggests that awareness could be improved, particularly among borrowers with lower incomes and education levels,” Bernanke said during a conference on community development.

As the credit market has grown and become more sophisticated, lenders have been able to extend credit to households and businesses that might previously have been considered unworthy of credit, he said.

In turn, the market for sub-prime borrowers -- people with weaker credit records who are considered higher risks -- has grown considerably over the years.

In 1994, fewer than 5% of mortgage originations were in the sub-prime market. But by 2005, about 20% of new mortgage loans were sub-prime, Bernanke said.

Against that backdrop, Bernanke asked whether borrowers were aware of the terms and conditions of their loans and whether consumers were sufficiently well-informed to be wary of potentially misleading marketing tactics and could shop effectively among lenders.

Further research to explore these questions and their possible connection to disparities in lending to members of minority groups would be highly worthwhile, Bernanke said.

A recent Fed study found that black and Latino home buyers pay more for their mortgages than do whites.

The Fed chairman also said that making sure that every American had a chance to improve his or her economic standing through hard work, saving, entrepreneurship and other activities was essential to building economically healthy communities.