WASHINGTON — The Federal Reserve would endorse congressional efforts to impose civil monetary penalties for lenders who establish a pattern of abuse when writing mortgages, governor Randall Kroszner said Thursday. Kroszner cautioned that there should be a mandated ceiling as well as a floor for such penalties, if approved by Congress, so the liability for bad behavior — chiefly predatory practices — is not open ended.Kroszner spoke a few hours before President Bush was set to announce an industry-wide agreement to freeze teaser rates for categories of distressed borrowers to be segmented and qualified by a combination of payment history and credit scores.Anticipating that announcement, Kroszner told Congress that it is necessary to limit the legal liability involved when workout solutions change the terms of securities based on distressed mortgages.Kroszner did not say the legal problems could be entirely eliminated nor the mortgage distress banished. Workout plans are critical but “there may be instances when such arrangements are not prudent or appropriate,” and careful steps should be taken to “recognize the existing legal rights of investors,” he said. Noting there is a source of “litigation risk” when servicers modify existing loans, Kroszner said the programs will be set up to handle loan modifications and should be arranged in “a bottom-up approach” which is “designed to balance the needs of all parties.” He recommended civil monetary penalties for lenders and servicers where there is a “pattern or practice of violations” when consumers are mislead with “penalties that are clearly articulated and that reasonably match the magnitude of the violation.” Kroszner repeated the challenges facing the housing market are significant and the Fed is initiating systematic steps to address irresponsible lending while curtailing the rising rate of foreclosures. — Market News International

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.