From Inman News:
Tighter standards for new mortgages coming soon
New guidelines that would require banks to tighten underwriting standards and track portfolio risks on nontraditional mortgages while providing more comprehensive disclosures to borrowers will be finalized this fall, a federal regulator told members of the Senate Banking Committee Wednesday.
Kathryn E. Dick, deputy comptroller of the Office of the Comptroller of the Currency, said that interest-only and payment-option adjustable-rate mortgages (ARMs) are complex products that are often marketed to people who don’t understand their risks. Guidelines instructing banks to do a better job informing consumers of those risks will be finalized in “weeks, not months,” she said.
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The banking industry has expressed its reservations about the proposed guidelines, saying they are too restrictive or unclear. Because the OCC’s proposed guidelines would only apply to federally insured banks and their affiliates and subsidiaries, bankers say they would give unregulated institutions a competitive advantage — even though those lenders are largely to blame for the perception that underwriting standards have been relaxed.
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“No law or regulation should ever require any mortgage originator to supplant the consumer’s ability to decide for him or herself what is or is not an appropriate loan product,” Hanzimanolis said. “As the decision-maker, the role of the consumer is to acquire the financial acumen necessary and take advantage of the competitive marketplace, shop, compare, ask questions and expect answers.”
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The OCC believes that “underwriting standards that do not include a credible analysis of a borrower’s capacity to repay their entire debt violate a fundamental principle of sound lending and elevate risks to both the lender and the borrower,” Dick said.The new guidelines will require that lenders base their underwriting analysis on the initial loan amount, plus any balance increase that may accrue over time if borrowers repeatedly choose the minimum monthly payment.
The new guidelines will also address the practice of issuing nontraditional loans with reduced documentation, especially unverified income. Banks will be directed not to approve loans with reduced documentation unless there are “other mitigating factors such as lower loan-to-value limits and other more conservative underwriting standards,” Dick said.