CRL, Consumer Advocates Push for Federal Subprime Guidance

More than 80 consumer groups representing over 60 million Americans are calling on federal regulators to develop guidance surround subprime adjustable-rate mortgages, saying that existing federal guidance for exotics does not sufficiently consider subprime loan products.

Last fall, regulators issued tougher guidelines for lenders that offer certain ‘non-traditional’ mortgages, including interest-only and payment-option loan products.

In a letter addressed yesterday to the Office of Thift Supervision, the FDIC, Federal Reserve, Office of the Comptroller of the Currency, the National Credit Union Administration and the Conference of State Bank Supervisors, advocates including the Center for Responsible Lending claimed that existing guidance does no go far enough to clarify the role of 2/28s or 3/27s, known loosely as ‘exploding’ ARMs.

“It’s like Washington has set out to repair a dangerous street, but they left a gaping hole where some of the traffic goes,� said Martin Eakes, CEO of the Center for Responsible Lending. “If regulators act now to provide explicit protections for these dangerous ARMs, we can slow down the flood of foreclosures on subprime loans and help ensure that homeowners get home loans they can sustain.�

The letter, endorsed by dozens of groups including AARP, the Leadership Conference on Civil Rights, the AFL-CIO, ACORN, Rainbow/Push, NAACP, Consumers Union, Consumer Federation of America, as well as the Center for Responsible Lending, called upon federal regulators to issue supplementary guidance covering subprime hybrid ARMs, subjecting the loans to the same underwriting standards as non-traditional mortgages. Current guidance for non-traditional products requires lenders to qualify borrowers at the fully-indexed rate.

The letter echoes the CRL’s commonly-held position that minorities will be affected disproportionately if regulators fail to take action, claiming that over 50 percent of home loans made to African Americans and 40 percent of loans made to Latinos are subprime loans, and that the majority of these loans are so-called exploding ARMs.

The CRL has garnered significant press, as well as industry heat, for a recent study which claimed that one out of five subprime loans originated in the past two years is headed for foreclosure. The study has been the topic of ongoing debate by mortgage bankers, with the Mortgage Bankers Association issuing a rebuttal of the CRL study, claiming that the consumer advocacy organization is manipulating data to achieve its conclusions.

For more information, visit http://www.responsiblelending.org.

Attachment: To read the full letter sent to the regulators, click here.