Expanded Guidance for Subprime Lending

The 2001 Expanded guidance for subprime lending programs is a document designed to define what parameters a borrower must fall into in order to be considered subprime.

The 2001 Expanded Guidance For Subprime Lending is a document that deals with the subprime lending market and it defines what parameters constitute a subprime borrower. The 2007 Statement on Subprime Mortgage Lending references this document and states very clearly, that 2001 Expanded Guidance on Subprime Lending is the document to use when a lender needs to define what criteria drops a borrower into the subprime category.

The 2001 Expanded Guidance For Subprime Lending expands on previous editions. The Office of the Comptroller of Currency as well as other agencies combined to create this expanded guidance. Subprime lending has become an increasingly larger issue and these agencies believe that responsible subprime lending can help the subprime consumer regain credit and generally improve their financial well-being.

That said, these agencies also believe that with greater risk comes greater fiduciary responsibility on the lender's part. Subprime loans should require diligent underwriting rules so that the borrower's ability to repay the loan is accurately assessed. Without such controls in place, there is a greater risk of loss to both the lender and the borrower.

What does this mean to the consumer? In particular the subprime consumer? First of all, this document defines what a subprime borrower is and what criterion is used to determine if a borrower is a prime borrower or subprime. The document states that a subprime borrower will have one or more of the following issues at the time a loan is applied for: poor credit score, poor credit history meaning one that includes late payments, collection accounts, charge-offs, repossessions, bankruptcy, poor debt-to- income ratios or a diminished ability to repay the loan. The document further defines the subprime borrower as follows:

• o to have a FICO (Fair Isaac Company) score of 660 or below.
  o Within the last 2 years has charge-offs, judgments, liens, or collection activity.
  o 2 late payments within the last year.
  o 1 late payment of over 60 days in the last 2 years.
  o Debt ratio of 50% or more.
  o Bankruptcy in the last 5 years.
  o Any other score by any other credit rating service, which would indicate a similar score to 660 on the FICO scale.

This is what all lenders are using to define a subprime borrower. If you meet even one of the above criteria, you are a subprime borrower even if your FICO score exceeds 660.

The document also defines predatory lending practices. This is something that needs to be made accessible to the public. Not all subprime lenders are predatory lenders. The agencies believe that properly administered subprime loans benefit both the borrower rand the lender. However, predatory lending takes the borrowers money without an exchange of equal value. Here are the top three categories of predatory lending practices:

• o Making loans based on the borrower's collateral instead of their ability to repay the loan. Typically, this is seen in housing and car loans.
• o Flipping or the coercion of requiring a borrower to regularly refinance in order to generate income for the lender by way of fees and points.
  o Participating in fraudulent and concealment activities that fail to reveal the loans true costs and fees to a borrower.

This document was a good start in defining the needs of the subprime borrower and the responsibilities of a subprime lender. The 2001 expanded Guidance for Subprime Lending still has its place. If you are a subprime borrower, you can obtain it on the internet. It is something you should read before you borrow.