Statement on Subprime Mortgage Lending

The US Treasury Department has issued a statement back in June of 2007 that deals with ARM products and lending practices. This statement on Subprime Mortgage Lending can be found online.

The Statement on Subprime Mortgage Lending Practices issued by the US Treasury Department is a 31 page document that makes a statement they felt need to be issued so that all of those who participated in subprime mortgage lending, and in particular those who participated in using ARMs (adjustable rate mortgages) as part of their lending practices will have appropriate guidelines to follow.

It is the agencies belief that many of the ARM loans that offer a low teaser rate for a short time and then adjust up to a rate that is based on a prime plus formula will change the loan from being affordable to one that causes undo financial hardship to borrowers. There are many other concerns that are addressed in this statement on subprime mortgage lending. They are listed below.

The Treasury Department is concerned that in addition to the above mentioned "sticker shock" many subprime mortgage lenders are not requiring proper documentation of income resulting in what we refer to as liar loans. By not documenting the borrower's ability to pay, the risk of default greatly increased for the borrower, which may result in increased risks for the seller as well.

Another concern that this agency has pertains to the initial introductory rate period. Many of these loans have substantial early prepayment penalties that extend past this initial period. This issue is further complicated by the fact that many subprime mortgage lenders fail to disclose to borrowers that there may be additional monthly payments associated with the loan but not paid by the loan. Some of these concerns are taxes and hazard insurance (homeowners insurance). The insurance will be required by the primary lien holder of the property as a condition of the loan. The other is a requirement of the local municipality.

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

Wow, as a consumer that statement really bothers me on a number of levels. The author feels that the average consumer is more than capable of determining when they are suffering from information overload. They do not need the subprime lending industry to decide this for them. Not disclosing all of the fees and costs associated with a loan is not information overload, it is deceptive. If they had nothing to hide, they would not be fighting full disclosure of fees and costs.

Another concern that all comments reflected is that the term subprime is not adequately defined within the document. Therefore statement included that the definitions and characteristics of the subprime borrower included in the 2001 Expanded Guidance For Subprime Lending Programs be used to determine what type of borrower is a subprime borrower.

Part of the statement on subprime mortgage lending stated that full amortizing repayment schedule as well as a reasonable estimate of taxes and insurances be issued to the borrower even if the taxes and insurance are not escrowed into the loan. Another statement from this document states that these charges be part of an accurate borrowers debt ratio calculation.

Overall the Statement on Subprime Mortgage Lending attempts to deal with the rising concern of partial disclosure of the true cost of a loan by subprime lenders.