1) Subprime Definition (based on borrower characteristics)
In 2001, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the Agencies) expanded previously issued examination guidance for supervising subprime lending activities. The Agencies reiterated their belief that responsible subprime lending can expand credit access for consumers and offer attractive returns. However, the agencies expect institutions to recognize that the elevated levels of credit and other risks arising from these activities require more intensive risk management and, often, additional capital. The following definition of subprime lending is taken from the guidance:
(Exclusions - For purposes of this guidance, subprime lending does not refer to individual subprime loans originated and managed, in the ordinary course of business, as exceptions to prime risk selection standards. The Agencies recognize that many prime loan portfolios will contain such accounts. Additionally, this guidance will generally not apply to: prime loans that develop credit problems after acquisition; loans initially extended in subprime programs that are later upgraded, as a result of their performance, to programs targeted to prime borrowers; and community development loans as defined in the CRA regulations that may have some higher risk characteristics, but are otherwise mitigated by guarantees from government programs, private credit enhancements, or other appropriate risk mitigation techniques.)
The term "subprime" refers to the credit characteristics of individual borrowers. Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers. Generally, subprime borrowers will display a range of credit risk characteristics that may include one or more of the following:
- Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months;
- Judgment, foreclosure, repossession, or charge-off in the prior 24 months;
- Bankruptcy in the last 5 years;
- Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of 660 or below (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood; and/or
- Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living expenses after deducting total monthly debt-service requirements from monthly income.
This list is illustrative rather than exhaustive and is not meant to define specific parameters for all subprime borrowers. Additionally, this definition may not match all market or institution specific subprime definitions, but should be viewed as a starting point from which the Agencies will expand examination efforts.
2) HMDA "Higher-priced" Loan Data Reporting Requirements
In 2004, lenders started collecting and reporting under HMDA information for "higher-priced" loans by the income-level of the census tract in which the property is located and by borrower characteristics (income, race, ethnicity, and gender). The information is not necessarily indicative of but can raise questions about predatory or abusive lending as well as discriminatory pricing. The data are also useful in determining the availability of different types of credit in neighborhoods.
A loan is "higher-priced" and covered by these reporting requirements only if the spread between the APR on the loan and the yield on comparable Treasury securities is greater than 3 percentage points for first-lien loans, or 5 percentage points or more for subordinate-lien loans. Therefore, while some lenders may have higher-priced loans to report, others may not.
In addition, all HMDA lenders must report: whether a loan is subject to the Home Ownership and Equity Protection Act (a so-called 'high cost" or "HOEPA" loan which may apply based on the interest rate or loan fees); the lien status of applications and originations; and whether the mortgage is for a manufactured home.
The FRB/FFIEC release aggregated data, and data for each reporter, which would include any information on higher priced loans, around August/September of each year for the prior year. The annual release of the data usually results in some scrutiny of the data by media, community organizations and others.
3) High-Rate, High-Fee, High Cost Loans (HOEPA/Section 32 Mortgages)
The Home Ownership and Equity Protection Act of 1994 (HOEPA). The law addresses certain deceptive and unfair practices in home equity lending. It amends the Truth in Lending Act (TILA) and establishes requirements for certain loans with high rates and/or high fees. The rules for these loans are contained in Section 32 of Regulation Z, which implements the TILA, so the loans also are called "Section 32 Mortgages." Here's what loans are covered, the law's disclosure requirements, prohibited features, and actions you can take against a lender who is violating the law.
What Loans Are Covered?
A loan is covered by the law if it meets the following tests:
for a first-lien loan, that is, the original mortgage on the property, the annual percentage rate (APR) exceeds by more than eight percentage points the rates on Treasury securities of comparable maturity;
for a second-lien loan, that is, a second mortgage, the APR exceeds by more than 10 percentage points the rates in Treasury securities of comparable maturity; or
the total fees and points payable by the consumer at or before closing exceed the larger of $547 or eight percent of the total loan amount. (The $547 figure is for 2007. This amount is adjusted annually by the Federal Reserve Board, based on changes in the Consumer Price Index.) Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees.
The rules primarily affect refinancing and home equity installment loans that also meet the definition of a high-rate or high-fee loan. The rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit (similar to revolving credit accounts).