WASHINGTON -- Stronger rules to protect U.S. borrowers may be warranted but must not curb innovation or impose costs that outweigh their benefits, Federal Reserve Board Governor Randall Kroszner said on Wednesday.
"In fulfilling its responsibility to protect consumers, the Federal Reserve will do all that it can to prevent fraudulent and abusive mortgage lending practices, Kroszner told the George Washington University School of Business.
U.S. regulators have been under fire for not better protecting borrowers who have been hurt in the subprime mortgage markets, where delinquencies have soared. The Fed is looking at the issue and will hold hearings on June 14, but Kroszner made plain that there was a balance to preserve.
"Any new rules should be drawn clearly to avoid creating legal or regulatory uncertainty that could have the unintended consequence of restricting consumers' access to responsible subprime credit," he said in the speech.
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Separately, to help consumers better understand credit card fees and rates, the Fed on Wednesday proposed changes to credit-card disclosures ranging from solicitations for new business to monthly updates in customers' statements.
One proposal — which could reduce revenues for the industry — would require card issuers to notify consumers 45 days ahead of changes to the terms of the account, instead of the current 15-day minimum.
U.S. households are heavily in debt by historical standards and the Fed has also been examining whether disclosure methods can be improved to help borrowers better understand their costs if they fail to keep up with credit card payments.
Employing intensive consumer surveys, which it also plans to apply to its study of mortgage documentation, Kroszner said the Fed had made some interesting discoveries and had a number of suggestions to make these instruments easier to comprehend.
It found consumers often threw loan documents away without reading them, and if they did read them, could not understand important technical descriptions.
"Grace period", "effective APR", "default APR", and "fixed rate" were all commonly found expressions which were not consistently translated into plain English and gave borrowers big problems, the Fed found.
"Consumers in our tests did not understand the term 'default APR'. We would therefore require creditors to refer to the "penalty APR" rather than the "default APR", which improved consumer understanding," Kroszner said, by way of example.
APR stands for annual percentage rate. Creditors must include the nominal APR with credit card statements, but the actual rate may vary if payments are delayed and fees added.
Another issue is the practice of offering low initial interest rates on home loans to entice customers, at the risk they borrow more than they can pay back when rates rise.
"The (Fed) Board will also review the requirements concerning advertisements, to ensure that when lenders promote low initial rates and low monthly payments they also adequately disclose the limits of those low rates and payments and the potential payment shock," he said.
But Kroszner made plain that he would not make any guesses about how the process would turn out.
"It is very important not to prejudge what we will do and certainly I could not speak for my other governors because anything we would do would have to go through a full (Fed) Board vote," he told an audience after delivering a speech.
"We want to make sure that we don't have abusive practices. But we want to make sure that we simply don't close down a market that, in many circumstances, can be useful for groups of consumers," he said.
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