Federal regulators on Thursday unveiled a set of recommendations for strengthening regulations governing mortgage lending, including improved disclosures and the adoption by all states of a nationwide licensing standard for mortgage brokers.

In announcing the recommendations Thursday, Treasury Secretary Henry Paulson said that "regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it."

The recommendations were outlined in a 21-page report issued by The President’s Working Group on Financial Markets, whose members include the Department of the Treasury, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission.

The group’s recommendations for reforming the mortgage origination process include:

  • Adoption by states of "strong nationwide licensing standards" for mortgage brokers, and of federal regulators’ guidance for nontraditional and subprime mortgage lending.

  • Strengthened state and federal oversight of companies that originate and fund mortgages or have other contact with customers in the mortgage origination process.

  • Stronger consumer protection rules from the Federal Reserve, along with improved disclosures making loan terms over the life of the mortgage more transparent and easier to compare with alternative products.

The report concluded that the current turmoil in financial markets was a result in a breakdown in underwriting standards for subprime mortgages, and a "significant erosion" of market discipline by those involved in bundling those loans into securities for sale to Wall Street investors.

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The Federal Reserve has begun a review of the Truth in Lending Act (TILA) rules for mortgage loans, and plans to propose new mortgage disclosures based on the results of consumer testing, the report said.

The Fed has already proposed changes to the TILA rules to address concerns about incomplete or misleading mortgage loan advertisements and solicitations and to require lenders to provide mortgage disclosures more quickly, which will be enacted after a 90-day comment period expires.

The Fed used its authority under the Home Ownership and Equity Protection Act (HOEPA) to propose new rules in December that are intended to address abuses related to prepayment penalties, failure to escrow for taxes and insurance, stated-income and low-documentation lending, and failure to give adequate consideration to borrowers’ ability to repay. These rules should be enacted once appropriate account has been taken of feedback received over the 90-day comment period, the report said.


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