Reactions to the Fed's Subprime Solution

FROM THESTREET.COM

Yesterday's announcement that the Federal Reserve endorsed new rules for lenders of subprime mortgages, which includes banning low-documentation loans and setting limits on penalties for borrowers who want to repay their loans early, set off a debate about how effective the plan would be -- and who would really benefit from it.

Some experts say the proposed changes to the Regulation Z (Truth in Lending) and the Home Ownership and Equity Protection Act will not help to repair the failing housing market, but will just benefit lenders and lock-out some buyers. Others say homeowners should be encouraged by the plan.

Some consumers and some industry pundits agree that regulating the subprime market will only reduce access to credit, but Kurt Eggert, a law professor who has testified to Congress on predatory lending issues and is a past member of the Federal Reserve Board's Consumer Advisory Council, says data do not support that theory.

"We have seen that the opposite is true," says Eggert. "By establishing clear and effective rules that require effective underwriting, escrowing of tax and insurance, and requiring effective documentation of the ability to repay the loans, the Fed could increase the access of beneficial credit to borrowers and increase investor confidence in subprime loans."

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