Dec. 18 (Bloomberg) -- The Federal Reserve will make it tougher for lenders to impose fees for early repayment of subprime home loans, according to consumer advocates and a regulator.

The change will probably be one of several proposals from the central bank's Board of Governors when officials convene in Washington today to respond to the collapse in the market for subprime mortgages.

Chairman Ben S. Bernanke is under fire from lawmakers, including Senate Banking Committee Chairman Christopher Dodd, who say the Fed didn't do enough to enforce lending rules and was too slow to write new regulations as subprime borrowing surged between 2004 and 2006. Record foreclosures are deepening the housing slump and threatening the six-year economic expansion.

``It would be an important step forward,'' said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America in Washington. `Had rules like this been in effect, the run up in foreclosures might never have occurred.''

While the recommendations may bring protests from lenders, it may not go as far as proposals in Congress to ban some prepayment penalties.

Fed spokeswoman Susan Stawick declined to comment. The Fed has already cut its benchmark interest rate by a full percentage point since September, while the Bush administration negotiated a freeze of up to five years on some subprime mortgage rates.

New Requirements

Fed staff, with input from policy makers, will propose as many as four new requirements for lenders today before a Board of Governors meeting scheduled for 10 a.m. They may also set two new standards for disclosure.

The proposal will suggest limiting prepayment penalties for most high-cost loans, while giving lenders some flexibility through several exceptions.

``The consensus seems to be that they are going to do something on no-documentation loans, and they are going to ban prepayment penalties,'' said Brenda Muniz, legislative director in Washington at Acorn, a community advocacy group. ``The devil is in the details,'' she said. There may be several loopholes for lenders, Muniz added.

The staff memorandum will also probably recommend lenders be forced to include property taxes and insurance in monthly payments. They are already included in payments on most prime home loans, which banks make to their best customers. The proposal will also address standards for measuring whether borrowers can afford a loan for the duration of the mortgage, instead of just for an initial period of lower interest rates.

Subprime loans are usually made to people with poor or incomplete credit histories.

Kroszner Endorsement

Randall Kroszner, the Fed governor responsible for banking regulation, endorsed including taxes and insurance during a speech last month.

``It is a common practice for these payments to be escrowed in the prime markets, and I see no reason that escrows should not be standard practice in the subprime markets too,'' Kroszner said in a Nov. 5 address in Washington.

Bernanke also said last week that the Fed will write at least two new rules on disclosure. ``The Board will also propose changes to the Truth in Lending Act rules to address concerns about mortgage-loan advertisements and solicitations that may be incomplete or misleading,'' Bernanke said in a Dec. 14 letter to Democratic Representative Brad Miller of North Carolina.

The Fed chairman also said the Board wants ``earlier disclosure'' by lenders.

Fed Authority

The Fed has rule-writing power over all financial institutions for disclosures and preventing abuse, while it shares enforcement authority with other agencies and states.

``The Fed has a tricky job here,'' said Joe Belew, president of the Consumer Bankers Association in Arlington, Virginia, which represents the 100 largest retail banks in the U.S. such as Citigroup Inc. and Wells Fargo & Co. ``How do we tighten controls on abusive practices without denying credit to deserving people even if it is at a higher cost? That is a macroeconomy issue.''

Lending standards at banks have tightened even for their best customers, causing mortgage borrowing to slow to the weakest pace in nine years in the third quarter, according to Fed figures.

The inventory of unsold single-family homes climbed to 10.5 months' supply in October, the highest since July 1985. Delinquency rates on subprime loans reached 16.3 percent in the third quarter, from 14.8 percent the previous three months.

Congressional Efforts

The Fed's actions coincide with efforts in Congress to stem foreclosures and protect consumers from future mortgage-lending abuses.

The House of Representatives last month passed legislation sponsored by House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, that would require lenders to ensure borrowers are issued loans they can afford to repay. It would also strengthen oversight of mortgage brokers.

Dodd, a Connecticut Democrat, introduced similar legislation last week.

Congress last week also gave final approval to legislation that would expand the ability of the Federal Housing Administration to insure mortgages for more subprime borrowers, sending it to President George W. Bush for his signature.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: December 18, 2007 00:26 EST