CFPB reveals subprime mortgage lending test standards
The Consumer Financial Protection Bureau released details Wednesday on how its examiners will assess the underwriting risk of mortgage lenders that offer non-traditional or subprime loan products. The agency outlined the procedures that its examiners will perform to evaluate bank and non-bank mortgage originators’ policies and procedures, assess whether originators are compliant with applicable laws and identify risks to consumers. If a lender offers non-traditional or subprime loan products and also offers loans that have two or more risky characteristics, the examiners must determine whether the increased risks are taken into account as part of the underwriting policies. They must also examine whether any mitigating factors are required for approval and whether actual underwriting practices conform with policies. According to the examiner guidelines, risky characteristics include: limited or no documentation of income, assets and/or employment; simultaneous second lien; negative amortization, option payment or interest-only features; introductory rate 200 basis points or more below fully-indexed rate; and balloon clauses. "The mortgage market cannot work well for consumers if the spotlight shines only on one part of it, while the rest is left in darkness," said CFPB director Richard Cordray said in a statement. "Our supervision program will illuminate the entire marketplace by making nonbanks play by the same rules as the banks." The Dodd-Frank Wall Street Reform and Consumer Protection Act significantly reformed gaps in federal supervision of the mortgage market by providing the CFPB with authority to supervise a range of mortgage participants. Other details that examiners must investigate are whether the compensation systems for underwriters (whether in-house or contracted) affects their incentives concerning the speed and quality of their underwriting. In addition, they must determine whether the lender frequently uses exceptions to override underwriting decisions in order to allow a greater volume of loans into the pipeline. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.