OCC 2005-46
OCC Bulletin

    Subject:  Nontraditional Mortgage Products
Description:  Request for Comment on Proposed Nontraditional 
              Mortgage Product Guidance

       Date:  December 29, 2005

TO:  Chief Executive Officers of All National Banks, Federal
     Branches and Agencies, Department and Division Heads, and
     All Examining Personnel

The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, and the
National Credit Union Administration (agencies) are seeking
comment on proposed guidance for nontraditional mortgage lending
products.  This notice and request for comment was published in
the Federal Register on December 29, 2005 (attached).

Nontraditional mortgage products include "interest-only" mortgage
loans, where a borrower defers loan principal for a specified
period, and "payment option" adjustable-rate mortgages, where a
borrower has several payment options including the potential for
negative amortization.  In addition, institutions are
increasingly combining these types of products with other higher-
risk practices, such as simultaneous second-lien mortgages and
the use of reduced documentation in the evaluation of an
applicant's creditworthiness.

While innovations in mortgage lending have the potential to
benefit consumers, the agencies are concerned that increasingly
liberal product terms and underwriting standards present
heightened risks that institutions must manage carefully.  We are
also concerned that nontraditional mortgage products continue to
be offered to a wider spectrum of borrowers, including some who
may not fully understand the associated risks.

The proposed guidance discusses the potential for heightened risk
levels and the importance of carefully mitigating risk.  It
specifically addresses loan terms and underwriting criteria,
portfolio and risk management practices, and consumer protection
concerns that may be raised by nontraditional mortgage loan
products.  The agencies have developed the proposed guidance to
help institutions offer these products in a safe and sound manner
and in a way that clearly discloses the potential risks that
borrowers may assume.

Comment is requested on all aspects of the guidance, particularly
expectations for comprehensive debt service qualification
standards.  Comments will be accepted through February 27, 2006.
For further information, contact Gregory Nagel, national bank
examiner, Credit Risk Policy Division, at (202) 874-5170.


Barbara J. Grunkemeyer
Deputy Comptroller
Credit Risk Division

Attachment:   70 FR 77249
              [http://www.occ.treas.gov/fr/fedregister/70fr77249.pdf]