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Fed Ready to Strengthen Regulations Tied to Lending Practices

Federal Reserve Chief Ben Bernanke outlined new rules Monday that are intended to protect homebuyers from risky lending practices blamed for a nationwide housing crisis. Wall Street Journal editor David Wessel examines the move.

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    In his remarks today, the Fed chairman laid out a series of prescriptions to deal with what he called the "ongoing turmoil" of the financial markets and to prevent future crises.

    The Fed moves include issuing new regulations in the coming days to crack down on shady lending practices; considering extending investment banks' ability to borrow money from the Fed; and calling on Congress to potentially give the Fed authority to collect information about the workings and holdings of borrowers, lenders, and financial firms.

    David Wessel is the economics editor for the Wall Street Journal, and he joins me for more on this story.

    Cracking down on risky loans, did the chairman get specific about what kinds of loans he wanted to see disappear from lenders' product lines?

  • DAVID WESSEL, Wall Street Journal:

    Well, he didn't get specific today, but the Fed has, over a number of years, really going back to 2006, been trying to figure out whether they should do more to limit some of the most egregious examples of subprime loans that turned out not to be in the interest of the borrower or the lender.

    And now next week they're finally going to issue the final regulations. It's a little bit like stomping very hard to outlaw laws that — outlaw loans that nobody is making anymore.

    But specifically they have a criteria for what constitutes a high-cost loan. And for these loans, the lender has to do such revolutionary things as make sure the person has the ability to pay it back and so forth.


    Does the Fed have the ability to make that rule for any institution that makes a loan on a house…what kinds of banks?


    Yes. One of the controversial things in the past was that the Fed had been a little reluctant to use the power that Congress had given it to cover people who make mortgage loans who aren't in the banking business that's primarily regulated by the Fed.

    And now the Fed is moving beyond that. In a way, they're saying, "These are things we wish we had done before in the years when Chairman Greenspan was in charge, but we're going to do them now because we see how bad the things have gotten."