United States Government Accountability Office

GAO Testimony 

Before the Subcommittees on Housing 

and Transportation and Economic Policy, 

Committee on Banking, Housing, and 

Urban Affairs, U.S. Senate 

ALTERNATIVE 

MORTGAGE PRODUCTS 

Impact on Defaults Remains 

Unclear, but Disclosure of 

Risks to Borrowers Could 

Be Improved 

Statement of Orice M. Williams, Director 

Financial Markets and Community Investment 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Wednesday, September 20, 2006

 

GAO-06-1112T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 20, 2006

ALTERNATIVE MORTGAGE PRODUCTS

Impact on Defaults Remains Unclear, but 

Disclosure of Risks to Borrowers Could 

Be Improved 

Highlights of GAO-06-1112T, a testimony 

to the Subcommittees on Housing and 

Transportation and Economic Policy, 

Committee on Banking, Housing, and 

Urban Affairs, U. S. Senate 

Alternative mortgage products

(AMPs) can make homes more 

affordable by allowing borrowers 

to defer repayment of principal or

part of the interest for the first few 

years of the mortgage. Recent

growth in AMP lending has 

heightened the importance of 

borrowers’ understanding and 

lenders’ management of AMP risks. 

GAO’s report discusses the (1) 

recent trends in the AMP market, 

(2) potential AMP risks for

borrowers and lenders, (3) extent 

to which mortgage disclosures

discuss AMP risks, and (4) federal 

and selected state regulatory

response to AMP risks. GAO used 

regulatory and industry data to 

analyze changes in AMP monthly 

payments under various scenarios;

reviewed available studies; and

interviewed relevant federal and 

state regulators and mortgage 

industry groups, and consumer 

groups. 

What GAO Recommends

GAO’s report includes a 

recommendation that as part of the 

Federal Reserve Board’s review of

existing mortgage disclosure

requirements, it should consider

revising those requirements to

improve the clarity and 

comprehensiveness of AMP 

disclosures. The Federal Reserve 

responded that it will conduct 

consumer testing to determine 

appropriate content and formats 

and use design consultants to 

develop model disclosure forms 

intended to better communicate 

information. 

From 2003 through 2005, AMP originations, comprising mostly interest-only 

and payment-option adjustable-rate mortgages, grew from less than 10

percent of residential mortgage originations to about 30 percent. They were

highly concentrated on the East and West Coasts, especially in California.

Federally and state-regulated banks and independent mortgage lenders and 

brokers market AMPs, which have been used for years as a financial

management tool by wealthy and financially sophisticated borrowers. In 

recent years, however, AMPs have been marketed as an “affordability” 

product to allow borrowers to purchase homes they otherwise might not be 

able to afford with a conventional fixed-rate mortgage. 

 

Because AMP borrowers can defer repayment of principal, and sometimes 

part of the interest, for several years, some may eventually face payment 

increases large enough to be described as “payment shock.” Mortgage 

statistics show that lenders offered AMPs to less creditworthy and less

wealthy borrowers than in the past. Some of these recent borrowers may 

have more difficulty refinancing or selling their homes to avoid higher 

monthly payments, particularly in an interest-rate environment where 

interest rates have risen or if the equity in their homes fell because they were 

making only minimum monthly payments or home values did not increase. 

As a result, delinquencies and defaults could rise. Federal banking regulators 

stated that most banks appeared to be managing their credit risk well by

diversifying their portfolios or through loan sales or securitizations. 

However, because the monthly payments for most AMPs originated between 

2003 and 2005 have not reset to cover both interest and principal, it is too 

soon to tell to what extent payment shocks would result in increased 

delinquencies or foreclosures for borrowers and in losses for banks. 

Regulators and others are concerned that borrowers may not be wellinformed about the risks of AMPs, due to their complexity and because 

promotional materials by some lenders and brokers do not provide balanced 

information on AMPs benefits and risks. Although lenders and certain 

brokers are required to provide borrowers with written disclosures at loan 

application and closing, federal standards on these disclosures do not 

currently require specific information on AMPs that could better help 

borrowers understand key terms and risks. 

In December 2005, federal banking regulators issued draft interagency

guidance on AMP lending that discussed prudent underwriting, portfolio and 

risk management, and consumer disclosure practices. Some lenders

commented that the recommendations were too prescriptive and could limit 

consumer choices of mortgages. Consumer advocates expressed concerns 

about the enforceability of these recommendations because they are 

presented in guidance and not in regulation. State regulators GAO contacted 

generally relied on existing regulatory structure of licensing and examining 

independent mortgage lenders and brokers to oversee AMP lending. 

www.gao.gov/cgi-bin/getrpt?GAO-06-1112T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Orice M. 

Williams at (202) 512-8678 or 

williamso@gao.gov.
Chairmen and Members of the Subcommittees: 

I am pleased to be here today to discuss our work on alternative mortgage 

products (AMPs). As you know, an increasing number of borrowers have 

turned to AMPs, such as interest-only and payment-option adjustable rate

mortgages (ARMs), to purchase homes they might not be able to afford

with conventional fixed-rate mortgage payments. These products initially 

keep borrowers’ payments low by allowing consumers in the short term to 

defer principal payments or make payments that do not cover principal or 

all accrued interest. However, unless the borrower refinances the 

mortgage or sells the property, the monthly payments eventually will 

increase when the interest-only and deferred payment periods end and 

higher, fully amortizing payments begin. 

My remarks will summarize the findings from the report being released 

today, which was prepared at the request of the Chairman of the 

Subcommittee on Housing and Transportation.1

 Specifically, I will discuss: 

(1) recent trends in the AMP market, (2) the impact of AMPs on borrowers 

and on the safety and soundness of financial institutions, (3) the extent to

which mortgage disclosures discuss the risks of AMPs, (4) the federal 

regulatory response to the risks of AMPs for lenders and borrowers, and 

(5) selected state regulatory responses to the risks of AMPs for lenders 

and borrowers. We gathered information from federal and state banking

regulators, consumer groups, and the mortgage industry on AMP-lending 

trends and risks to borrowers and lenders, including laws and regulations 

on mortgage disclosures. We also reviewed a sample of disclosures to 

determine the extent to which they addressed AMP risks. 

In summary, we found the following:

• AMP lending tripled over a 3-year period, and many borrowers were using 

interest-only or payment-option adjustable-rate products to purchase 

homes in high-priced markets. AMP lending has been concentrated in the 

higher-priced regional markets on the East and West Coasts in states such 

as California, Washington, Virginia, and Maryland. 

• Lenders may have increased risks to themselves and their customers by 

relaxing underwriting standards and through “risk-layering”, which 

 1

GAO, Alternative Mortgage Products: Impact on Defaults Remains Unclear, but 

Disclosure of Risks to Borrowers Could Be Improved, GAO-06-1021 (Washington, D.C.: 

Sept. 19, 2006). 

Page 1 GAO-06-1112T 
includes combining AMPs with less stringent income and asset verification 

requirements or lending to borrowers with lower credit scores and higher

debt-to-income ratios. However, it is too early to determine the extent to

which high foreclosure rates will result or whether lenders will be 

affected. 

• A wider spectrum of borrowers that are now using AMPs may not fully 

understand their risks because (1) AMP loans often have complicated 

terms and features, (2) AMP advertising sometimes emphasizes the 

benefits of AMPs over their risks, and (3) mortgage disclosures can be

unclearly written and may be hard to understand. Moreover, current 

federal disclosure requirements do not require lenders to address AMPspecific terms and risks. 

• Federal banking regulators collectively responded to AMP-lending 

concerns by issuing draft guidance that called for tightened underwriting, 

enhanced risk-management policies, and better information for 

consumers. Regulators also have individually responded by monitoring 

AMP lending, beginning to update the regulation governing mortgage 

disclosures, Regulation Z, and reinforcing the message about managing 

AMP risks to the mortgage industry.

• State regulators included in our review generally addressed concerns 

about AMP lending through their licensing and examination processes, 

although a few states have started to collect more AMP-specific 

information as a prelude to other possible actions. 

Given the complexity of AMPs and their more widespread use, mortgage 

disclosures that can help borrowers make informed decisions are 

important. Although federal banking regulators have taken a range of 

proactive steps to address AMP lending, current federal standards for 

disclosures do not require information on AMP-specific risks. Therefore, 

we recommended in our report that as the Federal Reserve Board reviews 

Regulation Z, it consider improving the clarity and comprehensiveness of 

mortgage disclosures by requiring language that explains key features and 

potential risks specific to AMPs. 

Borrowers obtain residential mortgages through either mortgage lenders 

or brokers. Mortgage lenders can be federally or state-chartered banks or 

mortgage lending subsidiaries of these banks or of bank holding 

companies. Independent lenders, which are neither banks nor affiliates of 

banks, also may fund home loans to borrowers. Mortgage brokers act as 

intermediaries between lenders and borrowers, and for a fee, help connect 

Background 

Page 2 GAO-06-1112T 
borrowers with various lenders that may provide a wider selection of 

mortgage products. 

Federal banking regulators—Office of the Comptroller of the Currency 

(OCC), the Board of Governors of the Federal Reserve System (Federal 

Reserve), Federal Deposit Insurance Corporation (FDIC), National Credit 

Union Administration (NCUA), and Office of Thrift Supervision (OTS)—

have, among other things, responsibility for ensuring the safety and 

soundness of the institutions they oversee. To pursue this goal, regulators 

establish capital requirements for banks; conduct on-site examinations 

and off-site monitoring to assess their financial conditions; and monitor 

their compliance with applicable banking laws, regulations, and agency 

guidance. As part of their examinations, for example, regulators review 

mortgage lending practices, including underwriting, risk-management, and 

portfolio management practices, and try to determine the amount of risk 

lenders have assumed. From a safety and soundness perspective, risk 

involves the potential that either anticipated or unanticipated events may 

have an adverse impact on a bank’s capital or earnings. In mortgage 

lending, regulators pay close attention to credit risk—that is the concerns

that borrowers may become delinquent or default on their mortgages and 

that lenders may not be paid in full for the loans they have issued. 

Certain federal consumer protection laws, including the Truth in Lending 

Act and its implementing regulation, Regulation Z, apply to all mortgage 

lenders and brokers that close loans in their own names. Each lender’s 

primary federal supervisory agency has responsibility for enforcing 

Regulation Z and generally uses examinations and consumer complaint 

investigations to check for compliance with both the act and its regulation. 

In addition, the Federal Trade Commission (FTC) is responsible for 

enforcing certain federal consumer protection laws for brokers and 

lenders that are not depository institutions, including state-chartered 

independent mortgage lenders and mortgage lending subsidiaries of 

financial holding companies. However, FTC is not a supervisory agency. 

FTC uses a variety of information sources in the enforcement process, 

including FTC investigations, consumer complaints, and state and federal

agencies. 

State banking and financial regulators are responsible for overseeing 

independent lenders and mortgage brokers and generally do so through 

licensing that mandates certain experience, education, and operations 

requirements to engage in mortgage activities. States also may examine 

independent lenders and mortgage brokers to ensure compliance with 

licensing requirements, review their lending and brokerage functions, and 

Page 3 GAO-06-1112T 
look for unfair or unethical business practices. In the event such practices 

or consumer complaints occur, regulators and attorneys general may 

pursue actions that include license suspension or revocation, monetary 

fines, and lawsuits. 

From 2003 through 2005, AMP lending grew rapidly, with originations 

increasing threefold from less than 10 percent of residential mortgages to 

about 30 percent. Most of the originations during this period consisted of 

interest-only ARMs and payment-option ARMs, and most of this lending 

occurred in higher-priced regional markets concentrated on the East and

West Coasts. For example, based on data from mortgage securitizations in 

2005, about 47 percent of interest-only ARMs and 58 percent of paymentoption ARMs were originated in California, which contained 7 of the 20 

highest-priced metropolitan real estate markets in the country. On the East 

Coast, Virginia, Maryland, New Jersey, and Florida as well as Washington,

D.C., exhibited a high concentration of AMP lending in 2005. Other 

examples of states with high concentrations of AMP lending include 

Washington, Nevada, and Arizona. These areas also experienced higher 

rates of home price appreciation during this period than the rest of the 

United States. 

In addition to this growth, the characteristics of AMP borrowers have 

changed. Historically, AMP borrowers consisted of wealthy and financially 

sophisticated borrowers who used these specialized products as financial 

management tools. However, today a wider range of borrowers use AMPs 

as affordability products to purchase homes that might otherwise be 

unaffordable using conventional fixed-rate mortgages. 

Although AMPs have increased affordability for some borrowers, they 

could lead to increased payments or “payment shock” for borrowers and 

corresponding credit risk for lenders. Unless the mortgages are refinanced 

or the properties sold, AMPs eventually reach points when interest-only 

and deferred payment periods end and higher, fully amortizing payments 

begin. Regulators and consumer advocates have expressed concern that 

some borrowers might not be able to afford these higher monthly 

payments. To illustrate this point, we simulated what would happen to a 

borrower in 2004 that made minimum monthly payments on a $400,000

payment-option ARM. As figure 1 shows, the borrower could see payments

AMP Lending Rapidly 

Grew and Borrower 

Characteristics 

Changed as 

Consumers Sought 

Mortgage Products 

That Increased 

Affordability 

Borrowers Could 

Face Payment Shock; 

Lenders Face Credit

Risk but Appear to Be 

Taking Steps to 

Manage the Risk

Page 4 GAO-06-1112T 
rise from $1,287 to $2,931, or 128 percent, at the end of the 5-year paymentoption period.

2

 In addition, with a wider range of AMP borrowers now than 

in the past, those with fewer financial resources or limited equity in their 

homes might find refinancing their mortgages or selling their homes 

difficult, particularly if their loans have negatively amortized or their 

homes have not appreciated in value.

Figure 1: Increase in Minimum Monthly Payments and Outstanding Loan Balance 

with an April 2004 $400,000 Payment-Option ARM, Assuming Rising Interest Rates

In addition, borrowers who cannot afford higher payments and may 

become delinquent or default on their mortgages may pose credit risks to 

lenders because these borrowers may not repay their loans in full. Lenders 

also may have increased risks to themselves and their customers by 

relaxing underwriting standards and through risk-layering. For example, 

some lenders combined AMPs with less stringent income and asset 

verification requirements than traditionally permitted for these products 

or lent to borrowers with lower credit scores and higher debt-to-income 

ratios. 

 2

This example assumes a $400,000 payment-option ARM with a 1 percent initial interest 

rate, a 7.5 percent annual payment increase cap, and a 10 percent negative amortization 

cap. The example reflects actual interest rates for 2004 to 2006 and rates are assumed to

remain unchanged thereafter. With an initial interest rate of 1 percent the borrower’s

minimum payment would be $1,287. However, the lender likely would have qualified the 

borrower based on a fully indexed rate of 4.41 percent, which corresponds to a first-year’s 

fully amortizing monthly payment of $2,039. Federal Reserve and OCC officials told us that 

lenders generally qualify payment-option ARM borrowers at the fully indexed interest rate. 

Although the borrower is faced with a payment shock of 128 percent in year six as a result 

of making minimum payments, the increase is 44 percent more than the monthly payment 

that was originally used to qualify the borrower. 

Page 5 GAO-06-1112T 
Although regulatory officials have expressed concerns about AMP risks 

and underwriting practices, they said that banks and lenders generally

have taken steps to manage the resulting credit risk. Federal and state 

banking regulatory officials and lenders with whom we spoke said most 

banks have diversified their assets to manage the credit risk of AMPs held 

in their portfolios, or have reduced their risk through loan sales or 

securitization. In addition, federal regulatory officials told us that while 

underwriting trends may have loosened over time, lenders have generally 

attempted to mitigate their risk from AMP lending. For example, OCC and 

Federal Reserve officials told us that most lenders qualify payment-option 

ARM borrowers at fully indexed rates, not at introductory interest rates, to 

help ensure that borrowers have financial resources to manage future 

mortgage increases, or to pay more on their mortgages than the minimum 

monthly payment. OCC officials also said that some lenders may mitigate 

risk by having some stricter criteria for AMPs than for traditional 

mortgages for some elements of their underwriting standards. Although 

we are encouraged by these existing risk mitigation and management 

strategies, most AMPs issued between 2003 and 2005, however, have not

reset to require fully amortizing payments, and it is too soon to tell how 

many borrowers will eventually experience payment shock or financial 

distress. As such, in our report we agree with federal regulatory officials 

and industry participants that it was too soon to tell the extent to which 

AMP risks may result in delinquencies and foreclosures for borrowers and 

losses for banks that hold AMPs in their portfolios. However, we noted 

that past experience with these products may not be a good indicator for 

future AMP performance because the characteristics of AMP borrowers 

have changed. 

Regulatory officials and consumer advocates expressed concern that some 

AMP borrowers may not be well-informed about the terms and risks of 

their complex AMP loans. Obstacles to understanding these products 

include advertising that may not clearly or effectively convey AMP risks, 

and federal mortgage disclosure requirements that do not require lenders 

to tailor disclosures to the specific risks of AMPs to borrowers. 

Borrowers May Not 

Be Well-informed of 

AMP Risks and 

Mortgage Disclosures 

May Not Effectively 

Describe These Risks 

to Consumers 

Page 6 GAO-06-1112T 
Marketing materials that we reviewed indicated that advertising by lenders 

and brokers may not clearly provide information to inform consumers 

about the potential risks of AMPs. For example, one advertisement we 

reviewed promoted a low initial interest rate and low monthly mortgage 

payments without clarifying that the low interest rate would not last the 

full term of the loan. 

In other cases, promotional materials emphasized the benefits of AMPs 

without effectively explaining the associated risks. Some advertising, for 

example, emphasized loans with low monthly payment options without 

effectively disclosing the possibility of interest rate changes or mortgage 

payment increases. One print advertisement we reviewed for a paymentoption ARM emphasized the benefit of a low initial interest rate but noted 

in small print on its second page that the low initial rate applied only to the 

first month of the loan and could increase or decrease thereafter. 

Regulatory officials noted that current Regulation Z requirements address 

traditional fixed-rate and adjustable-rate products, but not more complex 

products such as AMPs that feature risks such as negative amortization 

and payment shock. To better understand the quality of AMP disclosures, 

we reviewed eight interest-only and payment-option ARM disclosures 

provided to borrowers from federally regulated lenders. These disclosures 

were provided to borrowers between 2004 and 2006 by six federally 

regulated lenders that collectively made over 25 percent of the interestonly and payment option ARMs produced in 2005.We found that these 

disclosures addressed current Regulation Z requirements, but some did 

not provide full and clear explanations of AMP risks such as negative 

amortization or payment shock. For example, as shown in figure 2, the 

disclosure simply states that monthly payments could increase or decrease 

on the basis of interest rate changes, which may be sufficient for a 

traditional ARM product, but does not inform borrowers about the 

potential magnitude of payment change, which may be more relevant for 

certain AMPs. In addition, most of the disclosures we reviewed did not 

explain that negative amortization, particularly in a rising interest rate 

environment, could cause AMP loans to reset more quickly than borrowers 

anticipated and require higher monthly mortgage payments sooner than 

expected. 

Mortgage Advertising May 

Not Clearly or Effectively 

Explain AMP Risks 

Federal Disclosures May 

Not Clearly and 

Completely Explain AMP 

Specific Risks 

Page 7 GAO-06-1112T 
Figure 2: Example of 2005 Interest-only ARM Disclosure Explaining How Monthly 

Payments Can Change

In addition, the AMP disclosures generally did not conform to leading 

practices in the federal government, such as key “plain English” principles 

for readability or design. For example, the Securities and Exchange 

Sources: Name withheld. Used with permission; GAO (boxed comments).

Potential change

in monthly payments

Page 8 GAO-06-1112T 
Commission’s “A Plain English Handbook: How to Create Clear SEC 

Disclosure Documents (1998)” offered guidance for developing clearly 

written investment product disclosures and presenting information in 

visually effective and readable ways. The sample disclosures we reviewed, 

however, were generally written with language too complex for many 

adults to fully understand. Most of the disclosures also used small, hard-toread typeface, which when combined with an ineffective use of white 

space and headings, made them even more difficult to read and buried key 

information. 

Federal banking regulators have taken a range of actions—including 

issuing draft interagency guidance, seeking industry comments, 

reinforcing messages about AMP risks and guidance principles in many 

forums, and taking other individual regulatory actions—to respond to 

concerns about the growth and risks of AMP lending. Federal banking 

regulators issued draft interagency guidance in December 2005 that 

recommended prudent underwriting, portfolio and risk management, and

information disclosure practices related to AMP lending. The draft 

guidance calls for lenders to consider the potential impact of payment 

shock on borrowers’ capacity to repay their mortgages and to qualify 

borrowers on their ability to make fully amortizing payments on the basis 

of fully indexed interest rates. It also recommends that lenders develop 

written policies and procedures that describe portfolio limits, mortgage 

sales and securitization practices, and risk-management expectations. In

addition, to improve consumer understanding of AMPs, the draft guidance 

suggests that lender communications with borrowers, including 

advertisements and promotional materials, be consistent with actual 

product terms, and that institutions avoid practices that might obscure the 

risks of AMPs to borrowers. When finalized, the guidance will apply to all 

federally regulated financial institutions.3

During the public comment period for the guidance, lenders and others 

suggested in their letters that the stricter underwriting recommendations 

were overly prescriptive and might put federally and state-regulated banks 

at a competitive disadvantage because the guidance would not apply to 

independent mortgage lenders or brokers. Lenders said that this could 

Federal Banking 

Regulators Issued 

Guidance, Sought 

Industry Comments, 

and Took Other 

Actions to Respond to 

Concerns about AMP 

Lending 

 3

Federally regulated financial institutions include all banks and their subsidiaries, bank

holding companies and their non bank subsidiaries, savings associations and their 

subsidiaries, savings and loan holding companies and their subsidiaries, and credit unions. 

Page 9 GAO-06-1112T 
result in fewer mortgage choices for consumers. Consumer advocates 

questioned whether the guidance would actually help protect consumers. 

They noted that guidance might be difficult to enforce because it does not 

carry the same force as law or regulation. Federal banking regulatory 

officials are using these comments as they finalize the guidance. 

Even before drafting the guidance, federal regulatory officials had publicly

reinforced their concerns about AMPs in speeches, at conferences, and 

through the media. According to a Federal Reserve official, these actions 

have raised awareness of AMP issues and reinforced the message that 

financial institutions and the general public need to manage risks and 

understand these products. 

Some regulatory officials have also taken agency-specific steps to address 

AMP lending, including reviewing high-risk lending, which would include 

AMPs, and improving consumer education about AMP risks. For example, 

FDIC officials told us that they have developed a review program to 

identify high-risk lending areas and evaluate risk management and 

underwriting approaches. NCUA officials said that they have informally 

contacted their largest credit unions to assess the extent of AMP lending at 

these institutions. OTS officials said that they have performed a review of 

OTS’s 68 most active AMP lenders to assess and respond to potential AMP 

lending risks and OCC have begun to conduct reviews of their lenders’ 

AMP promotional and marketing materials to assess how well they inform

consumers. In response to concerns about disclosures, the Federal 

Reserve officials told us that they initiated a review of Regulation Z that 

includes reviewing the disclosures required for all mortgage loans, 

including AMPs, and have begun taking steps to consider disclosure 

revisions. During the summer of 2006, the Federal Reserve held hearings 

across the country on home-equity lending, AMP issues, and the adequacy 

of consumer disclosures for mortgage products. According to Federal 

Reserve officials, the Federal Reserve is currently reviewing the hearing

transcripts and public comment letters to help develop plans and 

recommendations for revising Regulation Z. In addition, they said that they 

are currently revising their consumer handbook on ARM loans, known as 

the CHARM booklet, to include information about AMPs. Finally, in May 

2006, FTC officials said that they sponsored a public workshop that 

explored consumer protection issues as a result of AMP growth in the 

mortgage marketplace and worked with federal banking regulators and 

other federal departments to create a brochure to assist consumers with 

mortgage information. 

Page 10 GAO-06-1112T 
State banking and financial regulatory officials from the eight states in our 

sample expressed concerns about AMP lending in their states; however, 

most relied on their existing regulatory system of licensing and examining

mortgage lenders and brokers to stay abreast of and react to AMP issues. 

Most of the officials in our sample expressed concern about AMP lending 

and the negative effects it could have on consumers, including how well 

consumers understood complex AMP loans and the potential impact of 

payment shock, financial difficulties, or default and foreclosure. Other 

officials expressed concern about whether consumers received complete

information about AMPs, saying that federal disclosures were 

complicated, difficult to comprehend, and often were not very useful to 

consumers. 

In addition to these general consumer protection concerns, some state 

officials spoke about state-specific issues. For example, Ohio officials 

expressed AMP concerns in the context of larger economic concerns, 

noting that AMP mortgages were part of wider economic challenges facing

the state. Ohio already has high rates of mortgage foreclosures and 

unemployment that have hurt both Ohio’s consumers and its overall 

economy. In Nevada, officials worried that lenders and brokers have 

engaged in practices that sometimes take advantage of senior citizens by 

offering them AMP loans that they either did not need or could not afford.

Most of the state regulatory officials said that they have relied upon state 

law to license mortgage lenders and brokers and ensure they meet 

minimum experience and operations standards. Most said they also 

periodically examine these entities for compliance with state licensing, 

mortgage lending, and consumer protection laws, including applicable fair 

advertising requirements. As such, most of the regulatory officials relied 

on systems already in place to investigate AMP issues or complaints and, 

when needed, used applicable licensing and consumer protection laws to 

respond to problems such as unfair and deceptive trade practices. 

Some state regulatory officials with whom we spoke said they have taken

other actions to better understand the issues associated with AMP lending 

and expand consumer protections. For example, some states such as New 

Jersey and Nevada have gathered data on AMPs to better understand AMP 

lending and risks. Others, such as New York, plan to use guidance 

developed by regulatory associations to help oversee AMP lending by 

independent mortgage lenders and brokers. 

In summary, it is too soon to tell the extent to which payment shock will 

produce financial distress for some borrowers and induce defaults that 

Most States in Our 

Sample Responded to 

AMP-Lending Risks 

within Existing 

Regulatory 

Frameworks, While 

Others Have Taken 

Additional Actions 

Page 11 GAO-06-1112T 
would affect banks that hold AMPs in their portfolios. However, the 

popularity, complexity, and widespread marketing of AMPs highlight the 

importance of mortgage disclosures to help borrowers make informed 

mortgage decisions. As a result, while we commend the Federal Reserve’s 

efforts to review and revise Regulation Z, we recommended in our report 

that the Board of Governors of the Federal Reserve System consider 

amending federal mortgage disclosure requirements to improve the clarity 

and comprehensiveness of AMP disclosures. In response to our 

recommendation, the Federal Reserve said that it will conduct consumer 

testing to determine appropriate content and formats and use design 

consultants to develop model disclosure forms intended to better 

communicate information. 

Chairmen of the subcommittees, this completes my prepared statement. I 

would be pleased to respond to any questions you or other Members may 

have at this time. 

For additional information about this testimony, please contact Orice M. 

Williams on (202) 512-5837 or at williamso@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on

the last page of this statement. Individuals making key contributions to 

this testimony include Karen Tremba, Assistant Director; Tania Calhoun;

Bethany Claus Widick; Stefanie Jonkman; Marc Molino; Robert Pollard; 

Barbara Roesmann; and Steve Ruszczyk. 

GAO Contact and 

Staff 

Acknowledgments 

Page 12 GAO-06-1112T 250316 
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