Fed Tightens Loan Rules After Failing to Stem Subprime Crisis

Federal Reserve Chairman Ben S. Bernanke took steps to restore the central bank's reputation after lawmakers blamed it for failing to contain the subprime mortgage crisis, announcing rules to rein in abusive lending.

Fed governors unanimously proposed banning subprime mortgages that lack income documentation and eliminating most prepayment penalties. The plans, announced yesterday after a six-month review, also make lenders responsible for determining whether borrowers can afford their mortgages even after low starter rates expire.

``Against a background of doing nothing, this is a step in the right direction,'' said Democratic Representative Brad Miller of North Carolina, who had urged stronger regulation. The Fed ``has had rule-making authority since 1994, and this is the first time they've proposed rules, so I'm not inclined to come down on Mr. Bernanke like a ton of bricks,'' he said.

The Fed's efforts to restrict some lending practices while steering away from a complete ban on some products drew a mixed reaction from lawmakers and consumer advocates, who both praised and criticized the Fed.

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