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Regulators crack down on abusive lenders

Associated Press The Spokesman-Review

WASHINGTON — Federal and state banking regulators on Tuesday said they would step up their scrutiny of lenders that make home loans to people with shaky credit, focusing on companies that operate outside federal banking oversight.

The pilot program announced by the Federal Reserve, two other federal agencies and state banking officials is scheduled to start in the fourth quarter and affect about 12 lenders.

It will be designed to examine firms that account for the majority of subprime loans, a category that has experienced a surge of defaults in recent months.

Problems in subprime first emerged in February, when lenders HSBC Holdings PLC and New Century Financial Corp. reported mounting payment defaults.

Numerous subprime lenders have since gone bankrupt or have been sold. Foreclosures were up 87 percent last month from year-ago levels, real estate information company RealtyTrac said last week.

The announcement of the program comes one day before Fed Chairman Ben Bernanke is scheduled to give the central bank’s midyear economic forecast to Congress.

Lawmakers have recently blasted the Fed for lax regulation of the mortgage market before the problems came to light.

Last month, Rep. Barney Frank, chairman of the House Financial Services Committee, threatened to strip the Federal Reserve of its authority to write rules against mortgage abuses if the central bank did not act quickly. And Sen. Christopher Dodd, a Connecticut Democrat and presidential candidate who chairs the Senate Banking Committee, said in May that a “chronology of regulatory neglect” allowed the problems in the subprime market to go unchecked.

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