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| # **NCUA LETTER TO CREDIT UNIONS**                                    |
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**NATIONAL CREDIT UNION ADMINISTRATION**

**1775 Duke Street, Alexandria, VA 22314**

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  **DATE: October 2006**              **LETTER NO.: 06-CU-16**

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**TO: Federally Insured Credit Unions**

**SUBJ: Interagency Guidance on**

> **Nontraditional Mortgage Product Risk**

**ENCL: (1)** [**Interagency Guidance on Nontraditional
Mortgage**](http://www.ncua.gov/letters/2006/CU/06-CU-16-encl-1.pdf)
[**Product
Risk**](http://www.ncua.gov/letters/2006/CU/06-CU-16-encl-1.pdf)

> **(2) [Interagency Credit Risk Management for Home Equity Lending
> Addendum](http://www.ncua.gov/letters/2006/CU/06-CU-16-encl-2.pdf)**

**(3)** [**Proposed Illustrations of Consumer Information
on**](http://www.ncua.gov/letters/2006/CU/06-CU-16-encl-3.pdf)

[**Nontraditional Mortgage
Products**](http://www.ncua.gov/letters/2006/CU/06-CU-16-encl-3.pdf)

Dear Board of Directors:

The purpose of this Letter is to provide all Federally Insured Credit
Unions with the final FFIEC *Interagency Guidance on Nontraditional
Mortgage Product Risk* and the *Addendum* to the May 2005 *Interagency
Credit Risk Management for Home Equity Lending* guidance. Both pieces of
guidance were produced jointly by the Federal Financial Institutions
Examination Council (FFIEC[^1]).

The FFIEC developed this guidance to address risks associated with the
growing use of mortgage products that allow borrowers to defer payment
of principal and, sometimes, interest. These products, referred to
variously as "nontraditional," "alternative," or "exotic" mortgage loans
(hereinafter referred to as nontraditional mortgage loans), include
"interest-only" mortgages and "payment option" adjustable-rate
mortgages. These products allow borrowers to exchange lower payments
during an initial period for higher payments later.

The attached guidance discusses prudent underwriting and risk management
practices for nontraditional mortgage loans, as well as the need to
ensure consumer understanding of loan terms and underlying product
risks. In addition to these documents, the FFIEC is issuing *Proposed
Illustrations of Consumer Information for Nontraditional Mortgage
Products* for public comment in the Federal Register. The Agencies
believe that illustrations of consumer

information may be useful to institutions as they seek to implement the
consumer information recommendations of the Interagency Guidance. Credit
Unions are encouraged to review and comment on the proposed
illustrations which are also attached to this letter.

If you have any questions regarding the enclosed document, please
contact your district examiner, regional office, or state supervisory
authority.

Sincerely,

/s/

JoAnn M. Johnson

Chairman

Enclosures

[^1]: The Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, National Credit Union Administration,
    Office of the Comptroller of the Currency, and Office of Thrift
    Supervision.