Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision
National Credit Union Administration
Federal Financial Regulatory Agencies
Propose Guidance on Nontraditional Mortgage Products
The federal financial regulatory agencies today issued for comment proposed
guidance on residential mortgage products that allow borrowers to defer
repayment of principal and sometimes interest.
mortgage products include "interest-only" mortgage
loans where a borrower pays no principal for the first few years of the
loan and "payment option" adjustable-rate mortgages where a
borrower has flexible payment options, including the potential for negative
amortization. Institutions are also increasingly combining these mortgages
with other practices, such as making simultaneous second-lien mortgages
and allowing reduced documentation in evaluating the applicant’s creditworthiness.
While innovations in mortgage lending can benefit some consumers, the agencies
are concerned that these practices can present unique risks that institutions
must appropriately manage. They are also concerned that these products and
practices are being offered to a wider spectrum of borrowers, including
subprime borrowers and others who may not otherwise qualify for more traditional
mortgage loans or who may not fully understand the associated risks of nontraditional
The proposed guidance discusses the importance of carefully managing the
potential heightened risk levels created by these loans. Toward that end,
Assess a borrower’s
ability to repay the loan, including any balances added through negative
amortization, at the fully indexed
rate that would apply after the introductory period. The agencies recognize
this requirement differs from underwriting standards at some institutions
and are specifically requesting comment on this aspect of the guidance.
Recognize that certain nontraditional mortgage loans are untested
in a stressed environment and warrant strong risk management standards
as well as appropriate capital and loan loss reserves.
Ensure that borrowers have sufficient information to clearly understand
loan terms and associated risks prior to making a product or payment
Comment is requested on all aspects of the guidance, particularly on
the section regarding comprehensive debt service qualification standards.
are due sixty days after publication in the Federal Register. The guidance