Industry NewsMortgage

New rules will disqualify many for subprime ARM loans

Banks told to look at ability to make payments after rate reset

Federal regulators have finalized new guidance on subprime lending, instructing banks and other lenders to qualify borrowers at the fully indexed rate, and not allow stated income and reduced documentation unless mitigating factors "clearly minimize the need for verification of a borrower's repayment capacity." The guidance on subprime lending, which applies to many adjustable-rate mortgages, also includes consumer protections including more thorough disclosure of loan terms and limits on prepayment penalties for borrowers seeking to refinance to avoid an interest rate reset. By instructing banks to qualify borrowers at the fully-indexed rate -- evaluating their ability to make monthly payments after an introductory interest rate expires -- the guidance is likely to reduce the number of people who are eligible for such loans. The Mortgage Bankers Association, which has opposed new restrictions on lenders, called the guidance "a strong statement that will help curb abuses, ...