On March 2, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision (collectively, the Banking Agencies) issued for comment a proposed Statement on Subprime Mortgage Lending (the Statement) intended to address “certain risks and emerging issues relating to subprime mortgage lending practices, specifically, particular adjustable-rate mortgage (ARM) lending products.”

The Statement is essentially divided into three parts. The first part discusses “criteria and factors, including payment shock, that an institution should assess in determining a borrower’s ability to repay a subprime loan.” The second part of the Statement examines issues related to consumer protection, including reminders about existing laws and regulations and concepts related to unfair and deceptive trade practices. Finally, the third part of the statement discusses the need for “policies, procedures and systems to assure that institutions’ subprime mortgage lending is conducted in a safe and sound manner.” It should be noted that the ARM products the Banking Agencies are most concerned with include those that contain the following characteristics: 

  • offering low initial payments based on fixed introductory or “teaser” rates that expire after a short initial period; 
  • approving borrowers without considering appropriate documentation of their income; 
  • setting very high or no limits on how much the payment amount or the interest rate may increase at reset periods; 
  • containing product features likely to result in frequent refinancing to maintain an affordable monthly payment; 
  • including substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period; and/or 
  • providing borrowers with inadequate information relative to product features, material terms and product risks, prepayment penalties, and the borrower’s obligations for property taxes and insurance.

Comments are due sixty days after publication in the Federal Register.