The US Federal Reserve proposed tough new rules on Tuesday in a broad crackdown on abusive mortgage lending practices almost two years into one of the US' worst housing downturns in decades.
The Fed is racing to tighten up the rules governing the trillion-dollar mortgage market as US home sales continue to fall and property foreclosures spike across the country.
Fed chairman Ben Bernanke said the central bank was moving to clean up mortgage lending while also aiming to protect unwary home buyers from potential fraud.
"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities and, indeed the economy as a whole," he said in a statement.
Some of the Fed's proposed rules specifically address "subprime" home loans granted to Americans with patchy credit and scant savings.
Defaults on subprime mortgages have been responsible for hundreds of thousands of home foreclosures this year that could create shockwaves for the US and global economies.
Bernanke unveiled the Fed's proposals a week after US President George W. Bush endorsed a Treasury-brokered plan that could help up to 1.2 million distressed homeowners at risk of losing their homes to foreclosure.
The Treasury-backed initiative would help struggling homeowners refinance subprime loans or freeze the interest rates on their loans for up to five years.
"We do expect that the housing market turbulence will take some time to work through, and that there will be some penalty on our short-term economic growth," Treasury Secretary Henry Paulson said in Kansas during a tour to brief Americans on the plan.
The Fed said it was acting because the mortgage market and its financing had become more complex in recent years, especially as big Wall Street banks had sliced up and traded large mortgage loan portfolios.
Officials said the Fed's multiple proposals would not significantly affect mortgage availability.
The proposals affecting subprime home loans would bar a lender from granting a mortgage without verifying a borrower's ability to repay the loan from sources other than just the home's value.
Some lenders offered so-called "no doc" loans during the housing boom which ran out of steam early last year, enabling people on low incomes to get on the property ladder, but "no document" loans make it difficult to determine a person's true financial health.
The subprime proposals would also prohibit a lender from issuing a loan without verifying a borrower's income and assets.
Regarding non-subprime loans, the new rules would bar lenders from paying mortgage brokers a fee to market higher-rate home loans, as well as barring a creditor or broker from coercing a home appraiser to inflate the value of a property.
Other measures would stop banks and lenders from advertising a mortgage interest rate as "fixed" when the rate is not truly fixed over the term of the loan.
The Fed unveiled its proposals as the government reported that US home construction fell 3.7 percent last month, partly as single-family home building dropped to its lowest level in more than 16 years.
The proposals will be open to industry feedback before being finalized by the Fed which regulates US banks and lending institutions.
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