WASHINGTON — The Federal Reserve Board proposed tough new rules Tuesday governing mortgage lending, seeking to clamp down on abusive lending practices that have contributed to the nation's worst housing slump in decades.

The proposed rules target unscrupulous lending, deceptive advertising and many bait-and-switch practices by mortgage brokers, who normally are regulated at the state level, but spottily. At the same time, the Fed sought not to impose regulations so strict that credit would stop flowing to poor borrowers, and it drew fire from critics for taking a middle-ground stance.

Even so, the rules would bring sweeping change to consumer lending practices and would apply to all state and federally licensed lenders. If adopted after a 90-day comment period, the rules would affect mortgage brokers nationwide, as well as all loan originators, whether they are banks, thrifts or even non-bank lenders, which also are chiefly regulated at the state level and were a main cause of today's problems.

Market forces already have taken care of the biggest non-bank lenders: Giant subprime loan specialists such as New Century Financial Corp. and Ameriquest are now bankrupt.

Fed leaders didn't offer a mea culpa for the meltdown in the subprime mortgage market, which serves borrowers with the weakest credit. But the broad reach of the proposed rules is a recognition that the Fed and other regulators fell down on the job.

"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and, indeed, the economy as a whole. They have no place in our mortgage system," Fed Chairman Ben Bernanke acknowledged in an opening statement during the Fed's rare public meeting. "Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy. We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated."

Lawmakers considering tough rules of their own ridiculed the Fed's proposal.

"We now have confirmation of two facts we have known for some time: One, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus," said Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee.

Senate Banking Committee Chairman Christopher Dodd, D-Ct., had suggested earlier that strong Fed rules could preclude the need for legislation. But Tuesday he said that the Fed "took a significant step backwards."

Consumer advocates also slammed the rules.

"This is better than nothing, but we still don't understand why they couldn't have been stronger, since the damage from not doing enough is literally unfolding before their eyes," said Kathleen Day, a spokeswoman for the Center for Responsible Lending in Durham, N.C.

Consumer advocates were upset that the Fed didn't ban a kickback called a yield-spread premium. That's a bonus that lenders give mortgage brokers when the brokers place borrowers into loans with higher interest rates than borrowers qualified for. Many borrowers were snookered by brokers who didn't fully disclose that they were arranging higher-priced loans.

These kickbacks must be disclosed to consumers, but they're buried in a stack of forms that must be signed, and often they're worded in ways that leave borrowers unaware that they qualified for lower rates. The proposed rules would force brokers into more transparent disclosure, but advocates felt stronger terms were needed.

"We just don't think disclosure is the answer," Day said.

Today's housing problems are rooted in a boom that began in 2001 and by late 2005 led to a serious erosion in lending standards, particularly for adjustable-rate loans to subprime borrowers.

As of late November, more than 7.2 million families held subprime loans, with an outstanding value of $1.3 trillion. About 14 percent of holders of subprime loans are in default or behind on payments. That number's expected to surge next year when many adjustable-rate loans issued in 2006 — the year when lending standards were weakest — reset to higher prices.

Specifically, the proposed rules would:

• Prohibit lenders from giving credit without considering the borrowers' ability to repay. This addresses "no doc" loans, where lenders never bothered to verify if borrowers could make payments.
• Require lenders to verify income and assets before making loans. This addresses "low doc" loans, where lenders did little to check if a borrower's stated income was true.
• Narrow use of prepayment penalties, which blocked many subprime borrowers from refinancing adjustable-rate mortgages before their rates jumped. Such penalties would continue, but only until 60 days before a loan rate resets. This would give borrowers who couldn't meet the higher loan payments time to refinance or sell without penalty.
• Require lenders to establish escrow accounts for taxes and insurance. Predatory lenders duped many subprime borrowers by not disclosing that taxes and insurance weren't included in their monthly payments.
• Prohibit lenders and mortgage brokers from pressuring real estate appraisers to misstate a home's value to win loan approval.
• Prohibit advertisements that tout "fixed" loan terms if at some point the rate can change. Many lenders offered "fixed" rates for three years, followed by adjustable rates.
• Prohibit loan servicers from "pyramiding" late fees. That's when they apply future principal and interest payments to late fees, making it appear that subsequent payments are also delinquent.
• Allow consumers to bring civil action for future violations of rules.

ON THE WEB

Read the Fed's proposed rules.

A snapshot of the sub-prime market.

More on how federal regulators fell down on the job.

More on the role of mortgage brokers in the housing mess.

More on the role of deceptive advertising: Deceptive ads at bottom of sub-prime mortgage crisis and Data sifters help unscrupulous mortgage lenders find their prey.

How Wall Street gave incentive to bad mortgage lending.