SAN DIEGO, CA -- Comptroller of the Currency
John C. Dugan said today it is vital that the key principles of the federal
nontraditional mortgage guidance not be watered down and that they should be
applied to all mortgage originators.
In a speech to the annual convention of
Americas Community Bankers, Mr. Dugan said that while the nontraditional
mortgage guidance applies to federally regulated institutions, it does not
apply to mortgage lenders and brokers regulated exclusively by the states,
creating an unlevel playing field that plainly distorts competition in the
nontraditional mortgage business. In
addition, a consumer protection gap exists with respect to the nontraditional
mortgage lending practices of a broad segment of mortgage lenders, he said.
It cannot be, as some have suggested, that
federal regulators should eliminate or lower standards that we believe are
necessary for prudent and effective regulation, Comptroller Dugan said. Instead, I believe that the standards must
be raised in the part of the mortgage business that we do not regulate so that
they are comparable to those applicable to federally regulated institutions.
Mr. Dugan said there is important work still to
be done at the state level to apply standards comparable to federal
guidance.
It ought to be fundamental that all mortgage
originators employ prudent lending practices, including credible consideration
of a borrowers ability to repay a loanas structuredfrom sources other than
the borrowers home pledged as collateral, he said. All mortgage originators should be providing
prospective customers clear and balanced disclosures about the relative risks
and benefits of nontraditional mortgages, including the risk of payment shock
and negative amortization.
Although there is nothing inherently wrong with
payment deferral products like nontraditional mortgages that have low early
payments and high later payments, he said, they are riskier and will not work
well in all circumstances. For many
consumers, especially subprime borrowers, payment deferral products raise the
real prospect of increased defaults and foreclosures when monthly payments
reset at much higher rates, Mr. Dugan said.
Comptroller Dugan said that interagency guidance
directs financial institutions to ensure that loan terms and underwriting
standards are consistent with prudent lending practices, with particular
attention paid to the borrowers capacity to make the payments necessary to
repay the full amount of the loan. The
guidance sets forth the expectation that banks with a portfolio of
nontraditional mortgages should adopt robust risk management practices that
provide early warnings of potential or increasing risks, he said.
In terms of consumer understanding, the
guidance calls for lenders to provide borrowers with disclosures about the
relative benefits and risks of these products that are short, clear, and free
of legal and financial jargon, Mr. Dugan said.
This information needs to be provided to borrowers when they are shopping
for loans, before they make the basic decision of what type of mortgage makes
the most sense.
Mr. Dugan said that he is encouraged by the
recent statements by the Conference of State Bank Supervisors and the American
Association of Residential Mortgage Regulators that they are working on a
version of the nontraditional mortgage guidance.
Indeed, the need for comparable action at the
state level is perhaps even more acute given the volume of nontraditional
mortgages made by non-federally regulated lenders to subprime borrowers, he
said.
Flexible features of nontraditional mortgages
reflect the creativity and dynamism of our financial markets in finding ways to
expand access to credit to facilitate home ownership, Mr. Dugan
concluded. But the last thing that any
of us wants is for the American dream of home ownership to turn into an
American nightmare of foreclosure. I
worry about that happening if disparate standards applied by different lenders
distort the markets of nontraditional mortgage loans.
The speech is available at
http://www.occ.gov/ftp/release/2006-115a.pdf.
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