The Minnesota Department of Commerce said it recently adopted regulatory guidelines for state-licensed mortgage originators regarding the risks associated with nontraditional mortgage products. The guidelines are intended to protect consumers from taking on high-risk mortgage loans without having a full understanding of the terms of those loans, according to the state agency. Nontraditional mortgage products include "interest-only" mortgages that allow a borrower to pay only the interest for the first few years of the loan and "payment option" adjustable-rate mortgages (ARMs) that include flexible payment options for the borrower.
"When choosing a mortgage product, Minnesota consumers need to have all of the information at their fingertips, including the likelihood of increased future payments," said Commerce Commissioner Glenn Wilson. "Adoption of these guidelines will ensure that Minnesota homeowners are well informed before they sign on the dotted line." The guidelines require mortgage originators to:
  • Ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower's repayment capacity;
  • Ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product choice.
The guidelines specifically tell mortgage originators to "alert consumers to the risks of these products, including the likelihood of increased future payment obligations." The Department said it recently mailed post cards to over 3,000 state-licensed mortgage companies alerting them to the new guidelines.