Late last week, federal financial regulatory agencies including the Board of Directors of the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision issued proposed guidance covering subprime mortgage lending. The guidance targets adjustable rate subprime loans, and according to regulators, addresses concerns that subprime borrowers may not fully understand the risks and consequences of obtaining adjustable-rate products. Regulators said they were also concerned that subprime ARMs may pose an elevated credit risk to financial institutions. Under the proposed guidance, an institution’s analysis of a borrower’s repayment capacity 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.
The proposed guidance also underscores that communications with consumers should provide clear and balanced information about the relative benefits and risks of the products. If adopted, this statement would complement the 2006 Interagency Guidance on Nontraditional Mortgage Product Risks, which did not specifically address the risks of these ARM products. While consumer groups lauded the move by regulators, the mortgage industry was more muted in its response to the proposed guidance, saying it might serve to restrict credit to homebuyers. “â€œThis is an important step toward a return to sensible lending,” said Martin Eakes, CEO of the Center for Responsible Lending, a consumer advocacy group. “Subprime loans comprise only 13 percent of outstanding mortgages, but they contribute over 60 percent of foreclosuresâ€”and the vast majority of subprime loans today are exploding ARMs.” â€œUnaffordable loans are a lynchpin in the current mortgage market,” said Willard Ogburn, executive director of the National Consumer Law Center. “We applaud the regulators for their proposal to consider a borrower’s ability to repay a loan. We hope policymakers will recognize that full underwriting for affordability is an essential requirement in a fair and functioning market.â€? The Mortgage Bankers Association was notably more muted in its response to the proposed agency guidance, characterizing the proposed guidance as an “overreaction” to current market conditions. “We appreciate the efforts of the bank regulators and the fact that this statement is proposed for public comment in order to open a dialogue,” said John Robbins, MBA chairman. “It is important to avoid an overreaction to an evolving marketplace or current economic conditions. Overly prescriptive measures run the risk of eliminating valuable financial options that help consumers and support homeownership. “We are concerned that the proposed statement, if adopted as proposed, may restrict credit to many consumers in high-cost areas and deny credit to many deserving low-income, minority, and first-time homebuyers.”