Fed Proposes Guidelines on Non- Traditional Mortgage Products

Fed Proposes Guidelines on Nontraditional Mortgage Products

The federal banking and credit union agencies have proposed guidance on residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest. According to their December 22 release, the agencies are concerned that these practices can present unique risks that institutions must appropriately manage. Included in the guidance is language concerning third-party origination, including that “if appraisal, loan documentation, or credit problems are discovered, the institution should take immediate action, which could include terminating its relationship with the third-party.”

The proposed guidance was issued by The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation, the Federal Deposit Insurance Corporation, Office of Thrift Supervision and the National Credit Union Administration. In it, they discuss the importance of carefully managing the potential heightened risk levels created by these loans including: assessing a borrower's ability to repay the loan; recognizing that certain nontraditional mortgage loans are untested in a stressed environment and warranting strong risk management standards as well as appropriate capital and loan loss reserves; and ensuring that a borrower has sufficient information to understand loan terms and associated risks.

The full guidance is available at www.federalreserve.gov/boarddocs/press/bcreg/2005/20051220/attachment.pdf

There will be a 60-day comment period on the proposal starting from the December 22 publication in the Federal Register. Since the agencies will jointly review all of the comments submitted, a single submission suffices. This can be done via the Federal eRulemaking Portal, located at www.regulations.gov by following the instructions for submitting comments. Include “OCC” and “Docket Number 05-21” in your comment. You can also visit the OCC Web site, www.occ.treas.gov, click on “Contact the OCC,” scroll down and click on “Comments on Proposed Regulations”; or send an e-mail to regs.comments@occ.treas.gov; fax to 202-874-4448; or write to Office of the Comptroller of the Currency, 250 E Street, S.W., Mail Stop 1-5, Washington, DC 20219.