Regulators Crack Down On Subprime Home Loan Practices

Lenders of subprime mortgages must include clear and balanced product disclosures to borrowers, conduct an analysis of the borrowers ability to repay, put limits on prepayment penalties to ensure borrowers can obtain loans they can afford to repay, and establish controls on their dealings with third-party lenders, a joint agency of the five major federal banking regulators announced today.

The guidelines spell out how lenders should treat consumers with poor credit background that are seeking mortgages.

Subprime mortgage loans have seen rising failure rates, with nearly 16 percent of the loans 60 days or more overdue in April, about double the rate of April 2006, according to tracker First American Loan Performance.

Many of the loans, known as adjustable-rate mortgages (ARMs), have low fixed introductory rates that rise after a set period. Some consumers have failed to meet mortgage payments after the adjustment.

The guidelines note that some lenders have relaxed standards on determining whether the borrower has the ability to repay their loan. Additionally, some lenders have failed to adequately obtain documentation of its borrowers’ finances.

The guidelines were developed by the Federal Financial Institutions Examination Council, an agency that includes representatives from the Federal Reserve Board, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, National Credit Union Administration, and the Office of Thrift Supervision. The FFIEC published a proposed statement in March seeking comment from the public and the banking industry.