ASSOCIATED PRESS
The Federal Reserve and other regulators yesterday announced a new pilot project to more closely monitor the mortgage practices of nondepository subprime mortgage firms.
Critics say such companies have slipped through the cracks of state and federal oversight, and abetted the rapid expansion of the subprime mortgage market during the recent housing boom. As many of these adjustable-rate mortgages went to higher rates over the past year, a record number of homeowners entered the foreclosure process.
Dozens of these companies have gone out of business, but not before causing a financial and regulatory mess that Washington and Wall Street are trying to clean up.
The new project is slated to begin in the fourth quarter of this year, and will focus on roughly a dozen “nondepository subsidiaries of bank and thrift holding companies, as well as mortgage brokers doing business with, or working for, these entities,” regulators said yesterday, one day before Fed Chairman Ben S. Bernanke is expected to face tough criticism on the central bank’s record of consumer protection.
The agencies wouldn’t say which companies would be a part of the pilot program, though each company will be a significant player in the subprime mortgage market.
Moreover, states “will conduct coordinated examinations of independent state-licensed subprime lenders and their associated mortgage brokers,” they stated.
U.S. Federal Reserve Governor Randall Kroszner said the pilot program “complements the other steps the Federal Reserve has taken to protect subprime borrowers.”
“The board believes stronger collaboration by state and federal agencies in enforcing consumer regulation across a broad range of nondepository institutions will help us to better weed out abuses,” Mr. Kroszner added.
The federal agencies involved include the Fed, Office of Thrift Supervision and the Federal Trade Commission. The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators will be participating from the state side.
“This is recognition that this is one industry regulated by many players, and to effectively supervise it we need a coordinated approach,” said John Ryan, executive vice president of the Conference of State Bank Supervisors.
The pilot program likely won’t immediately placate Democrats who have said the Fed refused to use its powers aggressively enough to protect consumers. But it could illustrate a changing regulatory philosophy at the central bank that might lead to other changes in coming months.
House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, has said if the Fed doesn’t increase its consumer-protection efforts by the fall, he would introduce legislation that would give some of that authority to other regulators.
Well over half of the subprime mortgages originated in 2005 came from independent, state-licensed mortgage companies and nonbank subsidiaries of bank and thrift holding companies, all of which would come under new scrutiny in the pilot program.
Findings from the pilot review could lead to enforcement actions or other measures, the agencies said.
The agencies said they would “also share information about the reviews and investigations, take action as appropriate, collaborate on the lessons learned, and seek ways to better cooperate in ensuring effective and consistent reviews of these institutions.”
The monitoring project will look at the lenders’ underwriting standards “as well as senior management oversight of the risk-management practices used for ensuring compliance with state and federal consumer protection regulations and laws.”
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