On June 29, 2007, the Federal financial regulators published a final Statement on Subprime Mortgage Lending ("Statement") that covers hybrid ARMs, no or low-documentation and other subprime mortgage loans. The Final Statement generally covers subprime hybrid ARMs; requires their underwriting to the "fully indexed rate;" limits the use of low documentation or no documentation loans to instances where there are mitigating factors; and requires clear and balanced information about the relative benefits and risks of products including the risk of payment shock, ramifications of prepayment penalties, balloon payments and responsibility for taxes and insurance. Prepayment penalties are not to extend beyond the initial reset period and institutions should provide borrowers with a reasonable period of time generally at least 60 days prior to the reset date to refinance their loan without penalty. The Statement also requires the establishment of control systems to assure compliance and notes that there will be supervisory review toward that end. Notably, there are new provisions on workout arrangements that encourage institutions to work constructively with residential borrowers who are in default or whose default is reasonably foreseeable.
MBA believes that the availability of nontraditional mortgage products, hybrid ARMs and low documentation loans are positive developments. The growth of the U.S. homeownership rate to nearly 70 percent over the last 10 years is due in large part to innovations in the mortgage market. MBA maintains that if these products are properly underwritten and described to consumers, borrowers should continue to have access to them as important affordable financing options. While MBA believes the regulators' efforts to promulgate guidance in this area are well intentioned, the implementation of such guidance must not be unduly restrictive. It is particularly important that federal and state guidance on these products be consistent. An inconsistent patchwork will significantly increase compliance costs and lessen competition, increasing prices and limiting credit options to consumers.
MBA will pursue efforts to provide clearer guidance to consumers and to help member firms comply with the consumer protection concerns. MBA will continue to strongly advocate that Federal and any state guidance be consistent in order to avoid higher costs to consumers.