Federal banking agencies issue subprime lending statement.
The agencies are concemed that borrowers may not fully understand the risks and consequences of obtaining products that can cause payment shock, particularly adjustable rate mortgages.
Loans with one or more of the following characteristics are of particular concern: Low initial payments based on a short introductory rate; Very high limits (or no limits) on payment amount or interest rate increases; Limited or no documentation of borrower's income; Product features likely to result in frequent refinancing to maintain an affordable monthly payment; and/ or Substantial prepayment penalties and/or prepayment penalties that extend beyond the initial fixed interest rate period.
To address these concerns, the Statement provides, among other things, that: In underwriting adjustable rate mortgages, lenders should include an evaluation of the borrower's ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule; Stated income and reduced documentation loans to subprime borrowers should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity (a higher interest rate is not considered a mitigating factor);
Lenders should work constructively with residential borrowers who are in default or whose default is reasonably foreseeable, and should consider prudent workout arrangements that are consistent with safe and sound lending procedures;
Information provided to consumers should clearly explain the risk of payment shock and the ramifications of prepayment penalties, balloon payments and the lack of escrow for taxes and insurance, as necessary;
The applicability of prepayment penalties should not exceed the initial interest rate reset period and, in general, borrowers should be provided a reasonable period of time (typically at least 60 days prior to the reset date) to refinance without penalty; and Lenders should develop strong control systems to monitor whether actual practices are consistent with their policies and procedures.
The statement applies to all banks and their subsidiaries, bank holding companies and their non-bank subsidiaries, savings associations and their subsidiaries, and credit unions. It does not apply to independent mortgage lenders that do not fall within any of the above categories.
The Statement focuses on "subprime" mortgage lending practices. The term "subprime" is not defined, but reference is made to a regulatory description issued in 2001.
That description states that subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. These borrowers may also display reduced repayment capacity as measured by credit scores or debt-to-income ratios. The 2001 description also states that subprime borrowers will generally display a range of credit risk characteristics that may include one or more of the following:
Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months; Judgment, foreclosure, repossession, or charge-off in the prior 24 months; Bankruptcy in the last 5 years; Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of 660 or below (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood; and/or Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living expenses after deducting total monthly debt-service requirements from monthly income.
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|Comment:||Federal banking agencies issue subprime lending statement.|
|Publication:||Real Estate Weekly|
|Date:||Aug 15, 2007|
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