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Alternative Mortgage Products
 Issue
Retaining the flexibility to develop innovative mortgage products to meet customer needs while providing for adequate supervision and appropriate and uniform standards for all mortgage originators.
Position Statement
ABA supports the ability of banks to use mortgage products to serve a broad array of consumers within the context of appropriate regulatory supervision that addresses abusive practices while allowing for innovation to serve customer needs. ABA believes that banks can use these mortgage products beneficially, applying proper underwriting standards. ABA supports adequate disclosure to potential borrowers about the terms of mortgage products. Restrictive standards on the use of these mortgage products should be applied in a careful way so as not to restrict credit-worthy consumers from getting loans. ABA also believes strongly that all mortgage lenders and brokers should be subject to the same lending standards that are applicable to depository institutions. ABA notes that the housing industry is currently undergoing problems at least partly because of widespread abuse of alternative mortgage products by entities and individuals not subject to effectively enforced standards of integrity. This atmosphere is currently stifling innovation, to the detriment of potential homeowners and those seeking opportunities to refinance their mortgages.
Explanation
The bank regulatory agencies are concerned about risks associated with the growth of alternative home mortgage products, including Interest Only ARMs, Option ARMs, Limited or No-Documentation Loans, and High Loan-to-Value Ratio Loans. Their concerns focus on the health of financial institutions, as well as on the impact on borrowers, from alternative mortgages when there is a downturn in the housing market or when the required monthly payments rise in such a precipitous manner as to jeopardize the ability of large numbers of mortgage holders to meet new payment requirements. ABA has stressed to the regulators that attention should be focused on the source of the problem, namely the non-bank mortgage originators whose underwriting and customer notification practices are substandard and not subject to effective enforcement programs. In comments submitted on proposed guidance governing alternative mortgage products, we noted that the imposition of restrictive guidelines on insured depositories might force such institutions to cease making these types of loans, leaving lenders and brokers within lighter supervisory programs as the only providers. These entities do not undergo bank-like examination and supervision and have used these products, in too many cases, to get borrowers into homes they could not realistically afford. Relevant standards that apply to regulated financial institutions should be applicable to all mortgage lenders and brokers and be enforced as effectively.
In October 2006, the agencies issued an Interagency Final Guidance on Nontraditional Mortgages, adopting several changes recommended by ABA. The Guidance applies to Interest Only and Option ARMs, and it sets forth practices for underwriting, portfolio monitoring, and consumer disclosure practices.
On March 8, 2007, the agencies published a proposed statement addressing certain practices engaged in by some subprime lenders. The ABA commented on the need to apply any regulatory response to all lenders and not just to insured depository institutions. We also stressed that a workable definition of "subprime" is required, lest affected institutions risk being subject to a final subprime statement that was inconsistent with earlier agency pronouncements.
Since then, the Federal Reserve Board has issued for comment proposed regulations affecting prepayment penalties, escrows, stated income loans, affordability, and other issues. Our position consistently has been to support efforts to ensure that borrowers are fully informed and that lenders extend credit only to borrowers who demonstrate the ability to repay. We have also consistently urged the regulators, however, to avoid taking steps that could inadvertently hurt consumers by removing the flexibility for lenders to address unique circumstances.
ABA will continue to work with the agencies to offer advice on proper underwriting and management of ARM products and appropriate consumer disclosure requirements. ABA will continue to stress to the agencies that all guidelines and consumer disclosures should be effectively applied to all mortgage originators. To accomplish this, any new mortgage disclosure requirements should be implemented with amendments to Reg Z, or issued under the Board's authority under the Home Ownership and Equity Protection Act (HOEPA). Such rules would apply to all lenders, but some believe that they may not apply to brokers. ABA urges that mortgage brokers must also be covered by such regulations, and if the Board lacks the authority to regulate brokers, then ABA supports additional legislation to extend that authority to regulate the brokers. (See also the entry under Anti-predatory Lending.)
Contact for further information: Mark Tenhundfeld (202) 663-5042.
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