WASHINGTON — The Federal Reserve, criticized for standing aside as risky subprime mortgage lending soared then crashed, did an about-face yesterday by proposing sweeping new consumer protections.

The Fed proposals would cover tens of thousands of banks and non-bank lenders, mortgage brokers and mortgage-servicing companies. They would rein in the dicey policies of some lenders, such as approving "no-document" loans based on stated income and penalizing borrowers who repay loans early.

Such loose standards led to surging foreclosures, forced scores of subprime lenders out of business, threw the housing market into recession and sparked a credit crunch as financial firms that bought bonds backed by the loans were stuck with sour investments.

But the proposals, which require a final vote, go well beyond the 20 percent of the mortgage market that is subprime, loosely defined as higher-cost loans to borrowers with poor credit. The Fed would tighten rules covering advertising, servicing and appraisals for conventional mortgages, too, affecting all home buyers.

"I can't think of a time when the Fed took sweeping action like this in the consumer-protection area without some specific mandate from Congress," said Robert Lawless, a law professor at the University of Illinois who specializes in bankruptcy and consumer credit.

Consumer groups, which have pushed the Fed and other regulators for years to take a tougher line, generally said the rules fell short and expressed concern that business groups would embrace the Fed plan as a way to head off tougher proposals by Democrats.

"I don't think (this) gets anybody off the hook from having to pass stronger legislation," said Janis Bowdler, senior housing analyst for the National Council of La Raza, a Hispanic advocacy group.

Still, the mortgage industry wasn't happy, either.

"We are concerned ... that some of the restrictions in the proposals may unnecessarily limit the credit options available to borrowers," said Kieran Quinn, chairman of the Mortgage Bankers Association.

The Fed rules are notable for both what they do and don't do. They won't help people now stuck in mortgages they can't afford. They don't untangle a confusing web of state and federal regulations. Enforcement would be run by an alphabet soup of agencies.

The Fed said it lacked authority to address such issues as the licensing of mortgage brokers or whether Wall Street firms that repackage mortgages into securities should be held liable for fraudulent loans.

But the rules would provide national consumer protections. And they'd ensure minimum standards if Congress failed to pass more comprehensive rules.

The move could also make the conservative Fed more receptive to broader regulation.

HOW FED PLAN WOULD WORK

USA Today

Q. Which loans would be covered?

A. The Fed rules cover mortgages with rates 3 percentage points above comparable Treasury bill rates and second mortgages or equity loans with rates 5 or more points above the Treasury rates. This would cover the subprime market and some of the "Alt-A" sector, which are loans that rate between prime and subprime. The Fed sees problems cropping up in Alt-A loans as well.

The rules would also impose tighter restrictions for mortgage broker payments, advertising and the servicing of conventional and subprime loans, affecting all borrowers. Consumers could sue for rule violations.

Q: What would be required of lenders?

A: Lenders would have to consider a borrower's ability to repay a loan not just at an initial "teaser" rate but over the life of the loan and whether a borrower can pay at the highest rate in the first seven years.

Lenders would have to verify borrowers' income and assets. More than half of 2006 subprime loans included little or no such supporting data. But consumers could use a variety of documents, including stubs from check-cashing firms or letters from employers — important for some people with only cash income.

Penalties for early repayment of a loan would have to expire at least 60 days before any rate increase. Many subprime adjustable-rate loans have imposed heavy prepayment penalties.

Lenders would have to create escrow accounts for borrowers' real estate taxes and insurance. Borrowers could opt out after a year. Lenders have sometimes advertised low rates excluding taxes and insurance.

Q: What about the rules covering all borrowers, including those with prime loans?

A: Mortgage brokers would have fewer incentives to put borrowers in loans with higher rates to earn a fatter fee. Borrowers would sign a document laying out the broker's total compensation.

Lenders and brokers would be barred from coercing appraisers to inflate a home's value. Mortgage servicers would have to credit an account the day a payment is received. Several ad schemes would be banned, including stating that a loan is "fixed" when the payment or rate isn't set for the life of the loan.

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