Federal Regulators Issue New Guidance for Lenders
According to Forbes.com, federal regulators directed banks to properly explain the risks posed to borrowers from interest-only and other nontraditional mortgages on September 29, 2006. Such guidance is aimed at addressing the fear that consumers do not understand the risk associates with such mortgages, such as rising interest rates, which could significantly affect their monthly payments.
The new guidance was issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration.
According to the regulators, banks need to make sure the loans they make are consistent with prudent lending practices, such as consideration of a borrower's repayment capacity. Accordingly, the new guidance will be used for audits of banks' operating procedures by the regulatory agencies.
Mark Zandi, chief economic at Moody's Economy.com, points out that mortgage delinquency and foreclosure rates are rising, which could begin to affect the banking system. Thus, according to Howard Glaser, an industry analyst with the Glaser Group in Washington, said the new guidelines reflect a deep concern by federal regulators about the impact of exotic mortgages on borrowers as well as banks.
However, it is the position of the Mortgage Bankers Association that delinquency and foreclosure rates are within the range of historical norms. According to Regina M. Lowrie, chairman of the mortgage group, the new guidelines propose a standard that will halt industry innovation and decrease consumer choice.