Dems Demand Ability-to-Pay Subprime Standard

Democrats on the Senate Banking Committee are turning up the heat on the Federal Reserve Board, demanding that it establish an ability-to-repay standard on subprime mortgages and designate the failure to escrow homeowners' insurance and property taxes as a deceptive lending practice.Under pressure from the committee, Fed Chairman Ben Bernanke had agreed to review the board's power under the Home Ownership and Equity Protection Act. Now the Democrats are demanding at least some minimum action. "The Board should create a presumption that a loan that requires a borrower to pay more than 50% of his or her income to cover the cost of principal, interest, taxes, and insurance is not a sustainable loan" and fails the repayment test, the 10 Democratic senators say in a letter to the Fed. The Democrats also stress that the failure to escrow taxes and insurance puts homeowners at risk. "Subprime lenders and brokers seem to routinely quote monthly payments to prospective borrowers that do not include taxes and insurance as a way of deceiving the borrowers into thinking their monthly obligations will be lower than their true costs," the April 23 letter says. "This is clearly a deceptive practice."