Federal banking regulators released their final ““Statement on Subprime Lending”“:http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070629/default.htm this week, which includes directives saying subprime ARM loans should be underwritten at fully-indexed rates with fully-amortizing repayment schedules. The agencies involved in the final statement include the Federal Reserve System, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corp., the Department of Treasury, and the National Credit Union Administration.
The regulators’ final statement on the “subprime issue” also maintains that income verification is a crucial step in the lending process, while also encouraging prudent workout arrangements for subprime borrowers struggling with rate resets.

In the final statement, the agencies involved in the statement said, “Qualifying consumers based on a low introductory payment does not provide a realistic assessment of a borrower’s ability to repay the loan according to its terms.” They also added that “the agencies continue to believe that institutions should maintain qualification standards that include a credible analysis of a borrower’s capacity to repay the loan according to its terms.”
The Mortgage Bankers Association (MBA) was one of the first agencies to release a response to the regulators’ final statement. In a press release,  MBA Chairman John Robbins said, “This is a strong statement that will help curb abuses, but will likely also constrain consumer credit choices.”
The MBA added that it urges Congress to pass FHA modernization to create affordable credit options for “worthy borrowers” and refrain from passing legislation that restricts credit further by “forcing lenders to deal with rigid underwriting standards and litigation risk.”
Click here to read the Federal Regulators full statement on subprime lending.
Click here to read the MBA’s response.