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Interagency Guidance on Subprime Lending

Interagency Guidance on Subprime Lending are several documents that were developed by multiple governmental agencies to deal with the growing subprime lending market.

The interagency guidance on subprime lending issued by the US Treasury Department and other governmental agencies is document that conveys a message these agencies felt needed to be issued to all of those who participate in subprime lending. In particular, they addressed those who participate in using adjustable rate mortgages as part of their lending practices so that these lenders will have appropriate guidelines to follow.

These agencies believe that ARMs offering a "teaser rate" for a short time and then adjust up to a rate that is based on a prime plus a percentage formulary will change an ARM from being affordable to one that causes undo financial hardship to borrowers. There are other concerns that are listed below.

Interagency statement on subprime mortgage lending voices concerns that in addition to the above mentioned issues, including the borrower's lack of understanding about the amount of future payments, some subprime lenders are underwriting liar loans. By not using due diligence in documenting the borrower's ability to repay the loan, the risk of default greatly increases for the borrower and the lender assumes a greater risk of loss as well.

Another concern that the interagency statement on subprime lending addresses pertains to the initial introductory interest rate time frame. These loans in general, have substantial early prepayment penalties that extend well into the life of the loan. This issue is further complicated by the fact that some subprime lenders fail to disclose to subprime borrowers that they might have additional monthly payments associated with the purchase pf property that are not incorporated into the loan. Some of these issues are taxes and insurances.

One of the most interesting facts contained in this statement is that prior to releasing it the agencies involved asked for comments from the lending industry and the public at large. The most repeated comments from the industry are that they oppose full disclosure about ARM rates and fees as this may result in information overload.

The author feels that non-disclosure all of the fees and costs associated with a loan is not information overload, it is deceptive lending practices. When subprime lenders realize this, and start giving consumers full disclosure they will realize that they will finally be seen as reputable entities. If there is nothing to hide, fighting mandatory full disclosure of fees and costs should not be an issue.

Another concern that all comments reflected is that the term subprime is not adequately defined within the document. Reference to the 2001 Expanded Guidance For Subprime Lending Programs definitions of subprime borrowers are to be used to determine what criterion constitutes a subprime borrower.

The statement on subprime mortgage lending suggests that a full repayment schedule as well as a reasonable estimate of taxes and insurances be issued to the borrower at the time of the loan origination, even if the taxes and insurance are not included in the loan. Furthermore, the document suggests that these charges be part of a borrower's debt-ratio calculation.

Overall, the Interagency Guidance on Subprime Lending is a document that finally deals with the huge concerns relating to the subprime lending market. This includes issues such only releasing partial disclosure of the true cost of a loan, defining what a subprime borrower is, and addressing other issues such as fees, costs, and predatory lending practices.