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 borrow