Today federal financial regulators issued a key statement on subprime mortgage lending that applies to banks, subsidiaries and affiliates of banks, and credit unions. The statement requires these federally-regulated entities to take common-sense precautions before approving subprime home loans.
This action by regulators represents an important first step toward bringing responsibility and integrity to the subprime market.
The statement encourages better lending practices that will benefit homeowners in several ways. Notably, the guidance discourages lenders from assessing a borrower's ability to repay a loan based on an artificially low "teaser" interest rate. The statement also will help prevent the routine practice of approving loans without properly verifying the applicant's income.
By raising the bar on assessing borrower qualifications, this guidance will help ensure that subprime loans made by federally-regulated lenders will be constructive and affordable for the families who receive them.
Now that the regulators have issued this statement, all eyes will be on the Federal Reserve Board, which has broader authority to take action against abusive lending practices. Congress has given the Federal Reserve Board a mandate to issue rules that would apply to all lenders. It is too late for the Board to stop the losses that have already occurred, but the Center for Responsible Lending calls on the Fed to act now to prevent abusive subprime loans in the future.
Actions recommended by CRL and others call on the Fed to ban prepayment penalties in the subprime market and clamp down on abuses by mortgage brokers.
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.