Released: July 02, 2007

Mortgage guidance is tightened

Source: USA Today

Federal bank regulators Friday issued tougher standards for higher-cost adjustable rate subprime mortgages, going after common but controversial practices such as penalties for early prepayment of loans, mortgages based on stated rather than documented income and products that borrowers cannot afford after an initial, low “teaser” rate expires.

Among the key elements of the guidelines: Borrowers should have at least 60 days to refinance a loan, without penalty, before it resets to a higher rate. Lenders need to show that a borrower can repay at the highest possible rate under the loan, not just the initial low rate. Banks will not be penalized for trying to restructure loans when a borrower has fallen behind. Consumer disclosures should include information on rate resets, balloon payments and the fact that, in addition to loan payments, borrowers are responsible for tax and insurance costs.

“The Federal Reserve and other banking regulators expect lenders to make sure subprime borrowers not only can afford their monthly payments while the introductory rate is in effect but also after the interest rate resets,” Federal Reserve Board Governor Randall Kroszner said in a statement.

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