Subprime Mortgage Lending: Statement on Subprime Mortgage Lending

The guidance attached to this bulletin continues to apply to federal savings associations.

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration (the agencies) have jointly issued the Interagency Statement on Subprime Mortgage Lending (statement). The agencies developed the statement to address issues and questions related to certain subprime mortgage products and lending practices. The agencies are particularly concerned with so called "2/28", "3/27", and similar adjustable-rate mortgages (ARMs) that expose borrowers to significant payment shock once introductory interest rates expire. Some of the product features and lending practices of concern include:

• Initial payments based on an introductory interest rate that is substantially lower than the fully-indexed rate,
• Very high or no limits on payment or interest-rate increases,
• Limited documentation of a borrower’s income, and
• Substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period.

To address these concerns, the statement sets forth expectations for sound lending practices and clear communications with borrowers. These include the expectation that an institution should evaluate a borrower’s ability to repay a debt by its final maturity at the fully-indexed rate, assuming a fully amortizing repayment schedule. The statement emphasizes that institutions should verify and document a borrower’s income, assets, and liabilities, and that reduced documentation should be accepted only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity. The statement also notes that prepayment penalties should not extend beyond initial interest-rate reset periods, and that borrowers should have a reasonable period prior to the reset date to refinance their loans without penalty.

The agencies are also concerned that borrowers may not be adequately informed of the product features, material loan terms, and product risks. The statement underscores that communications with consumers should provide clear and balanced information about the relative benefits and risks of these products.

The statement applies to all banks and their subsidiaries, bank holding companies and their nonbank subsidiaries, savings institutions and their subsidiaries, savings and loan holding companies and their subsidiaries, and credit unions.

This statement complements the agencies’ existing guidance on subprime lending programs (OCC Bulletins 1999-10 and 2001-6) and the 1993 Interagency Guidelines for Real Estate Lending.

For further information, contact Credit & Market Risk (202) 649-6670.

          /signed/          

Emory W. Rushton
Senior Deputy Comptroller and Chief National Bank Examiner

Related Links

• Statement 72 FR37569