Regulators Tighten Subprime Lending Rules

In June of 2007, government regulators tighten subprime lending rules. A document detailing new rule for subprime lenders was issued by the Treasury Department and other agencies. This document set forth the rules that all subprime lenders should abide by when considering subprime loans.

In June of 2007, The US Treasury Department in conjunction with other governmental agencies released a statement regarding the subprime lending market. Overall, this statement, a 31 page report, and details what subprime lenders are required to do in order to protect the financial future of both the lender and the borrower. This is how Government Regulators tighten subprime lending rules.

The first part of the document details what the industry needs to do in order to better inform subprime borrowers of the true cost of their ARM loans. ARM means adjustable rate mortgage. Many of these loans are offered to subprime borrowers with a very low introductory rate sometimes referred to as a "teaser rate". Prior to this document, these ARM loans made refinancing or early prepayment prohibitive due to the high fees assessed. Many of the penalties extended well into the life of the loan.

The guidelines set forth in this statement where regulators tighten subprime lending rules, requires all subprime lenders to fully disclose rates and fees that may be associated with the ARM. In addition, they have decided that liar loans, or loans that do not require full documentation of income and ability to repay should be curtailed. Another name for these loans are no-doc loans or low-doc loans. In my area of the US we call them liar loans because many borrowers over stated what their true income was in order to qualify for a loan they could not afford. Now we know where some of the problem with the subprime market began. There are exceptions to this rule if the borrower is refinancing a current mortgage or has a large asset that can be used as collateral.

Further, along the document spells out what predatory lending is and why predatory and deceptive practices should not be used. This statement made it very clear that all subprime lenders are not predatory lenders.

What does all of this mean to the subprime borrower? Now that regulators tightened subprime lending rules, it means that you no longer will be trapped into an ARM that is about to reset as there is a 60 day notice required. You will not be assessed high prepayment fees if you want to refinance early on in the loan. This will make it easier on those subprime borrowers in the future. The requirement that loans have better documentation for income verification is a good thing. Assessing a borrower's ability to repay the loan is critical.

Judging from the high rate of large subprime lending institutions that have failed n recent years, accurately determining the borrower's ability to repay is critical. Although many feel that this will make subprime loans impossible to get this is not true. All it is doing is forcing the subprime lenders to show due diligence in their efforts to determine a potential borrowers true ability to stay solvent. Foreclosures hurt everyone, the borrower, the lender and the local real estate market.

The statement has attempted to revamp the prior guidelines to be more in line with today's subprime market. When regulators tighten subprime lending rules they can start protecting both the subprime borrower from unscrupulous lenders and protecting lenders from self destructing due to poor underwriting habits, this document is an attempt to stabilize a market that is in an out of control downward spiral.