Congress eyes lending rules

A U.S. Treasury official warned Wednesday that fallout from the country’s mortgage problems would continue and the chairman of the Senate Banking Committee unveiled a plan to overhaul fair-lending rules.

“The ultimate impact of these events on the economy has yet to play out,” Treasury Undersecretary Robert Steel testified at a hearing of the House Financial Services Committee. “I do want to caution policymakers that this process is far from over.”

At the same time, Steel said, “overall economic fundamentals remain solid.” The Federal Reserve seemed to agree, saying in a report that the credit crunch prompted by woes in the mortgage industry had so far had only a limited effect on the overall economy.

But worries about the housing and credit markets dragged stocks down Wednesday. “What we have is a severe lack of investor confidence,” said Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee. Frank plans to introduce legislation to curb loan practices deemed “predatory” by consumer advocates.

Sen. Christopher J. Dodd (D-Conn.), the Banking Committee chairman and a Democratic presidential hopeful, said Wednesday that he had prepared a bill to ban mortgage prepayment penalties, which can make it impossible for a delinquent borrower to refinance on more favorable terms.

Dodd said he also wanted to prohibit brokers and lenders from steering borrowers into costly loans when they qualified for cheaper ones, and to require lenders of high-cost, sub-prime mortgages to set up escrow accounts enabling borrowers to spread out payments for taxes and insurance rather than face steep, lump-sum payments for those items.

“Most importantly, my bill will help keep Americans in their homes while also helping to restore public confidence in our mortgage and capital markets,” Dodd said.

Soaring mortgage delinquency rates and weakness in mortgage-backed securities have emerged as economic and political problems, with an estimated 2 million adjustable-rate home loans scheduled to become more expensive as monthly payments are reset over the next two years. That has raised concerns that mortgage foreclosures, already at their highest level in years, will continue to soar.

Political pressure to address the mortgage problems is rising and several advocacy groups released statements in support of Dodd’s approach.

“Reckless lending has unleashed a torrent of home foreclosures and destabilized financial markets,” said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. “There should be no denying that the lack of adequate consumer protection helped cause the current crisis.”

In a change from the past, both the House and Senate bills would make clear that fair-lending rules applied to brokers, a group that has not historically fallen under the purview of U.S. financial regulators.

Some lawmakers cautioned that excessively strict lending laws would backfire by prompting lenders to withhold credit, even from deserving borrowers.

“We should not rush out and change a market that is working and working well,” said Rep. Spencer Bachus of Alabama, senior Republican on the Financial Services Committee.

With public anxiety on the rise, President Bush last week offered a package of proposals to address the mortgage problems. Among them was a measure that would enable more homeowners who have fallen behind on adjustable-rate loans to refinance their debt with federally insured mortgages.

jonathan.peterson@latimes.com