The Fed and the OCC, among others, issued a final Statement on Subprime Mortgage Lending today. The guidance primarily addresses the use of ARMs in the subprime mortgage market:
… standards include a fully indexed, fully amortized qualification for borrowers and cautions on risk-layering features, including an expectation that stated income and reduced documentation should be accepted only if there are documented mitigating factors that clearly minimize the need for verification of a borrower’s repayment capacity. Consumer protection standards include clear and balanced product disclosures to customers and limits on prepayment penalties that allow for a reasonable period of time, typically at least 60 days, for customers to refinance prior to the expiration of the initial fixed interest rate period without penalty.
Here’s the formal statement. Keep in mind this guidance really only applies to federally-insured lending institutions engaging in subprime lending. A good part of the subprime mortgage market doesn’t sit in this regulated space — something WaMu went so far as to actually take issue with this in an a press release on Business Wire earlier today (no link available): “We remain concerned about the unlevel playing field that exists because the guidance does not apply to all lenders,” the company said in its press statement.