Federal Register / Vol. 72, No. 131 / Tuesday, July 10, 2007 / Notices 37569 

1For example, ARMs known as ‘‘2/28’’ loans 

feature a fixed rate for two years and then adjust 

to a variable rate for the remaining 28 years. The 

spread between the initial fixed interest rate and the 

fully indexed interest rate in effect at loan 

origination typically ranges from 300 to 600 basis 

points. 

Dated: July 2, 2007. 

Karen Solomon, 

Director, Legislative and Regulatory Activities 

Division, Office of the Comptroller of the 

Currency. 

[FR Doc. E7–13283 Filed 7–9–07; 8:45 am] 

BILLING CODE 4810–33–P 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

[Docket No. OCC–2007–0005] 

FEDERAL RESERVE SYSTEM 

[Docket No. OP–1278] 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

DEPARTMENT OF THE TREASURY 

Office of Thrift Supervision 

[No. 2007–31] 

NATIONAL CREDIT UNION 

ADMINISTRATION 

Statement on Subprime Mortgage 

Lending 

AGENCIES: Office of the Comptroller of 

the Currency, Treasury (OCC); Board of 

Governors of the Federal Reserve 

System (Board); Federal Deposit 

Insurance Corporation (FDIC); Office of 

Thrift Supervision, Treasury (OTS); and 

National Credit Union Administration 

(NCUA) (collectively, the Agencies). 

ACTION: Final guidance—Statement on 

Subprime Mortgage Lending. 

SUMMARY: The Agencies are issuing a 

final interagency Statement on 

Subprime Mortgage Lending. This 

guidance has been developed to clarify 

how institutions can offer certain 

adjustable rate mortgage (ARM) 

products in a safe and sound manner, 

and in a way that clearly discloses the 

risks that borrowers may assume. 

EFFECTIVE DATE: July 10, 2007. 

FOR FURTHER INFORMATION CONTACT: 

OCC: Michael Bylsma, Director, 

Community and Consumer Law 

Division, (202) 874–5750 or Stephen 

Jackson, Director, Retail Credit Risk, 

(202) 874–5170. 

Board: Division of Banking 

Supervision and Regulation: Brian P. 

Valenti, Supervisory Financial Analyst, 

(202) 452–3575, Virginia M. Gibbs, 

Senior Supervisory Financial Analyst, 

(202) 452–2521, or Sabeth I. Siddique, 

Assistant Director, (202) 452–3861; 

Division of Consumer and Community 

Affairs: Kathleen C. Ryan, Counsel, 

(202) 452–3667, or Jamie Z. Goodson, 

Attorney, (202) 452–3667; or Legal 

Division: Kara L. Handzlik, Attorney 

(202) 452–3852. Board of Governors of 

the Federal Reserve System, 20th Street 

and Constitution Avenue, NW., 

Washington, DC 20551. Users of 

Telecommunication Device for Deaf 

only, call (202) 263–4869. 

FDIC: Beverlea S. Gardner, 

Examination Specialist, (202) 898–3640, 

Division of Supervision and Consumer 

Protection; Richard B. Foley, Counsel 

(202) 898–3784; Mira N. Marshall, 

Acting Chief Community Reinvestment 

Act and Fair Lending, (202) 898–3912; 

April A. Breslaw, Acting Associate 

Director, Compliance Policy & Exam 

Support Branch, Division of 

Supervision and Consumer Protection, 

(202) 898–6609. 

OTS: Tammy L. Stacy, Director of 

Consumer Regulation, Compliance and 

Consumer Protection Division, (202) 

906–6437; Glenn Gimble, Senior Project 

Manager, Compliance and Consumer 

Protection Division, (202) 906–7158; 

William J. Magrini, Senior Project 

Manager, Credit Risk, (202) 906–5744; 

or Teresa Luther, Economist, Credit 

Risk, (202) 906–6798. 

NCUA: Cory W. Phariss, Program 

Officer, Examination and Insurance, 

(703) 518–6618. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Agencies developed this 

Statement on Subprime Mortgage 

Lending to address emerging risks 

associated with certain subprime 

mortgage products and lending 

practices. In particular, the Agencies are 

concerned about the growing use of 

ARM products 1 that provide low initial 

payments based on a fixed introductory 

rate that expires after a short period, and 

then adjusts to a variable rate plus a 

margin for the remaining term of the 

loan. These products could result in 

payment shock to the borrower. The 

Agencies are concerned that these 

products, typically offered to subprime 

borrowers, present heightened risks to 

lenders and borrowers. Often, these 

products have additional characteristics 

that increase risk. These include 

qualifying borrowers based on limited 

or no documentation of income or 

imposing substantial prepayment 

penalties or prepayment penalty periods 

that extend beyond the initial fixed 

interest rate period. In addition, 

borrowers may not be adequately 

informed of product features and risks, 

including their responsibility to pay 

taxes and insurance, which might be 

separate from their mortgage payments. 

These products originally were 

extended to customers primarily as a 

temporary credit accommodation in 

anticipation of early sale of the property 

or in expectation of future earnings 

growth. However, these loans have more 

recently been offered to subprime 

borrowers as ‘‘credit repair’’ or 

‘‘affordability’’ products. The Agencies 

are concerned that many subprime 

borrowers may not have sufficient 

financial capacity to service a higher 

debt load, especially if they were 

qualified based on a low introductory 

payment. The Agencies are also 

concerned that subprime borrowers may 

not fully understand the risks and 

consequences of obtaining this type of 

ARM loan. Borrowers who obtain these 

loans may face unaffordable monthly 

payments after the initial rate 

adjustment, difficulty in paying real 

estate taxes and insurance that were not 

escrowed, or expensive refinancing fees, 

any of which could cause borrowers to 

default and potentially lose their homes. 

In response to these concerns, the 

Agencies published for comment the 

Proposed Statement on Subprime 

Mortgage Lending (proposed statement), 

72 FR 10533 (March 8, 2007). The 

proposed statement provided guidance 

on the criteria and factors, including 

payment shock, that an institution 

should assess in determining a 

borrower’s ability to repay the loan. The 

proposed statement also provided 

guidance intended to protect consumers 

from unfair, deceptive, and other 

predatory practices, and to ensure that 

consumers are provided with clear and 

balanced information about the risks 

and features of these loans. Finally, the 

proposed statement addressed the need 

for strong controls to adequately manage 

the risks associated with these products. 

The Agencies requested comment on 

all aspects of the proposed statement, 

and specifically requested comment 

about whether: (1) These products 

always present inappropriate risks to 

institutions and consumers, or the 

extent to which they may be appropriate 

under some circumstances; (2) the 

proposed statement would unduly 

restrict the ability of existing subprime 

borrowers to refinance their loans, and 

whether other forms of credit are 

available that would not present the risk 

of payment shock; (3) the principles of 

the proposed statement should be 

applied beyond the subprime ARM 

market; and (4) limitations on the use of 


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2Media Release, CSBS & AARMR, ‘‘CSBS and 

AARMR Support Interagency Statement on 

Subprime Lending’’ (March 2, 2007), available at 

http://www.csbs.org/AM/ 

Template.cfm?Section=Search&template=/CM/ 

HTMLDisplay.cfm&ContentID=10295. 

3Federally insured credit unions should refer to 

LCU 04–CU–13—Specialized Lending Activities. 

prepayment penalties would help meet 

borrower needs. 

The Agencies collectively received 

137 unique comments on the proposed 

statement. Comments were received 

from financial institutions, industryrelated trade associations (industry 

groups), consumer and community 

groups, government officials, and 

members of the public. 

II. Overview of Public Comments 

The commenters were generally 

supportive of the Agencies’ efforts to 

provide guidance in this area. However, 

many financial institution commenters 

expressed concern that certain aspects 

of the proposed statement were too 

prescriptive or could unduly restrict 

subprime borrowers’ access to credit. 

Many consumer and community group 

commenters stated that the proposed 

statement did not go far enough in 

addressing their concerns about these 

products. 

Financial institutions and industry 

groups stated that they supported 

prudent underwriting, but opposed a 

strict requirement that ARM loans 

subject to the proposed statement be 

underwritten at a fully indexed rate 

with a fully amortizing repayment 

schedule. They also stated that these 

loan products are not always 

inappropriate, particularly because they 

can be a useful credit repair vehicle or 

a means to establish a favorable credit 

history. Many of these commenters 

expressed concern that the proposed 

statement would unduly restrict credit 

to subprime borrowers. They also 

requested that the proposed statement 

be modified to allow lenders flexibility 

in helping existing subprime borrowers 

refinance out of ARM loans that will 

reset to a monthly payment that they 

cannot afford. 

The majority of financial institutions 

and industry group commenters 

opposed the application of the proposed 

statement outside the subprime market. 

A number of these commenters 

requested clarification of the scope of 

the proposed statement and the 

definition of ‘‘subprime.’’

Some industry group commenters also 

expressed concern that consumer 

disclosure requirements would put 

federally-regulated institutions at a 

disadvantage and cause consumer 

information overload. They also 

requested that any changes to consumer 

disclosure requirements be part of a 

comprehensive reform of existing 

disclosure regulations. 

Consumer and community group 

commenters generally supported the 

proposed statement. Many of these 

commenters expressed their concern 

that the products covered by the 

proposed statement present 

inappropriate risks for subprime 

borrowers. Many of these commenters 

supported extending the scope of the 

proposed statement to other mortgage 

products. These commenters supported 

the proposed underwriting criteria, 

though a number of them suggested 

stricter underwriting criteria. They also 

supported further limiting or 

prohibiting the use of reduced 

documentation and stated income loans, 

suggesting that such a reduction would 

be in the best interests of consumers. 

Both industry group and consumer 

and community group commenters 

expressed concern that the proposed 

statement will not apply to all lenders. 

Industry group commenters indicated 

this would put federally-regulated 

financial institutions at a competitive 

disadvantage. Consumer and 

community group commenters 

encouraged the Agencies to continue to 

work with state regulators to extend the 

principles of the proposed statement to 

non-federally supervised institutions. 

Since the time that the Agencies 

announced the proposed statement, the 

Conference of State Bank Supervisors 

(CSBS) and the American Association of 

Residential Mortgage Regulators 

(AARMR) issued a press release 

confirming their intent to ‘‘develop a 

parallel statement for state supervisors 

to use with state-supervised entities.’’ 2

III. Agencies’ Action on Final Joint 

Guidance 

The Agencies are issuing the 

Statement on Subprime Mortgage 

Lending (Statement) with some changes 

to respond to the comments received 

and to provide additional clarity. The 

Statement applies to all banks and their 

subsidiaries, bank holding companies 

and their nonbank subsidiaries, savings 

associations and their subsidiaries, 

savings and loan holding companies 

and their subsidiaries, and credit 

unions. Significant comments on 

specific provisions of the proposed 

statement, the Agencies’ responses, and 

changes to the proposed statement are 

discussed below. 

Scope of Guidance 

A number of financial institution and 

industry group commenters and two 

credit reporting companies requested 

that the definition of ‘‘subprime’’ be 

clarified. A financial institution and an 

industry group commenter requested a 

bright-line test to determine if a 

borrower falls into the subprime 

category. 

The Agencies considered 

commenters’ requests that a definition 

of ‘‘subprime’’ be included in the 

Statement. The Agencies determined, 

however, that the reference to the 

subprime borrower characteristics from 

the 2001 Expanded Guidance for 

Subprime Lending Programs (Expanded 

Guidance) provides appropriate 

information for purposes of this 

Statement. The Expanded Guidance 

provides a range of credit risk 

characteristics that are associated with 

subprime borrowers, noting that the 

characteristics are illustrative and are 

not meant to define specific parameters 

for all subprime borrowers.3 Because the 

term ‘‘subprime’’ is not consistently 

defined in the marketplace or among 

individual institutions, the Agencies 

believe that incorporating the subprime 

borrower credit risk characteristics from 

the Expanded Guidance provides 

sufficient clarity. 

A number of commenters also 

requested clarification as to whether the 

proposed statement applies to all 

products with the features described. In 

addition, the Agencies specifically 

requested comment regarding whether 

the proposed statement’s principles 

should be applied beyond the subprime 

ARM market. All consumer and 

community groups and some of the 

financial institutions who addressed 

this question supported application of 

the proposed statement beyond the 

subprime market. However, most 

financial institution and industry group 

commenters opposed application of the 

proposed statement beyond the 

subprime market. These commenters 

stated that the issues the proposed 

statement was designed to address are 

confined to the subprime market and 

expansion of the proposed statement to 

other markets would unnecessarily limit 

the options available to other borrowers. 

As with the proposed statement, the 

Statement retains a focus on subprime 

borrowers, due to concern that these 

consumers may not fully understand the 

risks and consequences of these loans 

and may not have the financial capacity 

to deal with increased obligations. The 

Agencies did revise the language to 

indicate that the proposed statement 

applies to certain ARM products that 

have one or more characteristics that 

can cause payment shock, as defined in 

the proposed statement. While the 

Statement has retained its focus on 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 72, No. 131 / Tuesday, July 10, 2007 / Notices 37571 

subprime borrowers, the Agencies note 

that institutions generally should look 

to the principles of this Statement when 

such ARM products are offered to nonsubprime borrowers. 

Risk Management Practices 

Predatory Lending Considerations 

Some financial institution and 

industry group commenters raised 

concerns that the proposed statement 

implied that subprime lending is ‘‘per 

se’’ predatory. The Statement clarifies 

that subprime lending is not 

synonymous with predatory lending, 

and that there is no presumption that 

the loans to which the Statement 

applies are predatory. 

Qualifying Standards 

The proposed statement provided that 

subprime ARMs should be underwritten 

at the fully indexed rate with a fully 

amortizing repayment schedule. Many 

consumer and community groups 

supported the proposed statement’s 

underwriting standards. Other 

consumer and community groups 

thought that the proposed qualifying 

standards did not go far enough, and 

suggested that these loans should be 

underwritten on the basis of the 

maximum possible monthly payment. 

The majority of industry group 

commenters who addressed this issue 

opposed the proposed underwriting 

standard as overly prescriptive. Some 

commenters also requested that the 

Statement define ‘‘fully indexed rate 

with a fully amortizing repayment 

schedule.’’ All of the commenters that 

addressed the issue favored including a 

reasonable estimate of property taxes 

and insurance in an assessment of 

borrowers’ debt-to-income ratios. 

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. This analysis should consider 

both principal and interest obligations 

at the fully indexed rate with a fully 

amortizing repayment schedule, plus a 

reasonable estimate for real estate taxes 

and insurance, whether or not 

escrowed. 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. Therefore, the 

proposed general guideline of qualifying 

borrowers at the fully indexed rate, 

assuming a fully amortizing payment, 

remains unchanged in the final 

Statement. The Agencies did, however, 

provide additional information 

regarding the terms ‘‘fully indexed rate’’

and ‘‘fully amortizing payment 

schedule’’ to clarify expectations 

regarding how institutions should assess 

borrowers’ repayment capacity. 

Reduced Documentation or Stated 

Income Loans 

Several commenters raised concerns 

about reduced documentation or stated 

income loans. The majority of 

commenters who addressed this issue 

supported the proposed statement’s 

position that institutions should be able 

to readily document income for many 

borrowers and that reduced 

documentation should be accepted only 

if mitigating factors are present. A few 

financial institution and industry group 

commenters urged the Agencies to allow 

lenders some flexibility in deciding 

when these loans are appropriate for 

borrowers whose income is derived 

from sources that are difficult to verify. 

On the other hand, some consumer and 

community group commenters stated 

that borrowers are not always given the 

option to document income and thereby 

pay a lower interest rate. They also 

indicated that stated income loans may 

be a vehicle for fraud in that borrower 

income may be inflated to qualify for a 

loan. 

The Agencies believe that verifying 

income is critical to conducting a 

credible analysis of borrowers’

repayment capacity, particularly in 

connection with loans to subprime 

borrowers. Therefore, the final 

Statement provides that stated income 

and reduced documentation should be 

accepted only if there are mitigating 

factors that clearly minimize the need 

for verification of repayment capacity. 

The Statement provides some examples 

of mitigating factors, and sets forth an 

expectation that reliance on mitigating 

factors should be documented. The 

Agencies note that for many borrowers, 

institutions should be able to readily 

document income using recent W–2 

statements, pay stubs, and/or tax 

returns. 

Workout Arrangements 

The Agencies specifically requested 

comment on whether the proposed 

statement would unduly restrict the 

ability of existing subprime borrowers to 

refinance out of certain ARMs to avoid 

payment shock. The Agencies also 

asked about the availability to these 

borrowers of other mortgage products 

that do not present the risk of payment 

shock. The majority of financial 

institution and industry group 

commenters who responded to this 

specific question believed that the 

proposed statement would unduly 

restrict existing subprime borrowers’

ability to refinance. However, most 

consumer and community groups who 

addressed the issue expressed the view 

that allowing existing borrowers to 

refinance into another unaffordable 

ARM was not an acceptable solution to 

the problem and, therefore, that 

eliminating this option would not be an 

undue restriction on credit. Some 

commenters mentioned that certain 

government-sponsored entities and 

lenders have already committed to 

revise their lending program criteria 

and/or create new programs that 

potentially may provide alternative 

mortgage products for refinancing 

existing subprime loans. 

To address these issues, the Agencies 

incorporated a section on workout 

arrangements in the final text that 

references the principles of the April 

2007 interagency Statement on Working 

with Borrowers. The Agencies believe 

prudent workout arrangements that are 

consistent with safe and sound lending 

practices are generally in the long-term 

best interest of both the financial 

institution and the borrower. 

Consumer Protection Principles 

Prepayment Penalties 

The Agencies specifically requested 

comment regarding whether 

prepayment penalties should be limited 

to the initial fixed-rate period; how this 

practice, if adopted, would assist 

consumers and affect institutions; and 

whether an institution’s providing a 

window of 90 days prior to the reset 

date to refinance without a prepayment 

penalty would help meet borrower 

needs. The overwhelming majority of 

commenters who addressed this 

question agreed that prepayment 

penalties should be limited to the initial 

fixed-rate period, and several 

commenters proposed a complete 

prohibition of prepayment penalties. 

Commenters suggested different time 

frames for expiration of the prepayment 

penalty period, ranging from 30 to 90 

days prior to the reset date. Several 

industry group commenters, however, 

opposed such a limitation. They stated 

that prepayment fees are a legitimate 

means for lenders and investors to be 

compensated for origination costs when 

borrowers prepay prior to the interest 

rate reset. Further, these commenters 

noted that most lenders do not offer 

mortgage products that have 

prepayment penalty periods that extend 

beyond the fixed interest rate period 

and that borrowers should be allowed 

time to exit the loan prior to the reset 

date. 

In light of the comments received, the 

Agencies revised the Statement to state 


jlentini on PROD1PC65 with NOTICES
37572 Federal Register / Vol. 72, No. 131 / Tuesday, July 10, 2007 / Notices 

4Federal credit unions are prohibited from 

charging prepayment penalties. 12 CFR 701.21. 

5 12 CFR part 226 (2006). 

6 24 CFR part 3500 (2005). 

7 71 FR 58673 (October 4, 2006). 

8The Agencies consist of the Board of Governors 

of the Federal Reserve System (the Board), the 

Federal Deposit Insurance Corporation (FDIC), the 

National Credit Union Administration (NCUA), the 

Office of the Comptroller of the Currency (OCC), 

and the Office of Thrift Supervision (OTS). 

9The term ‘‘subprime’’ is described in the 2001 

Expanded Guidance for Subprime Lending 

Programs. Federally insured credit unions should 

refer to LCU 04–CU–13—Specialized Lending 

Activities. 

10Payment shock refers to a significant increase 

in the amount of the monthly payment that 

generally occurs as the interest rate adjusts to a 

fully indexed basis. Products with a wide spread 

between the initial interest rate and the fully 

indexed rate that do not have payment caps or 

periodic interest rate caps, or that contain very high 

caps, can produce significant payment shock. 

11For example, ARMs known as ‘‘2/28’’ loans 

feature a fixed rate for two years and then adjust 

to a variable rate for the remaining 28 years. The 

spread between the initial fixed interest rate and the 

fully indexed interest rate in effect at loan 

origination typically ranges from 300 to 600 basis 

points. 

that the period during which 

prepayment penalties apply should not 

exceed the initial reset period, and that 

institutions generally should provide 

borrowers with a reasonable period of 

time (typically, at least 60 days prior to 

the reset date) to refinance their loans 

without penalty. There is no 

supervisory expectation for institutions 

to waive contractual terms with regard 

to prepayment penalties on existing 

loans.4

Consumer Disclosure Issues 

Many financial institution and 

industry group commenters suggested 

that the Agencies’ consumer protection 

goals would be better accomplished 

through amendments to generally 

applicable regulations, such as 

Regulation Z (Truth in Lending) 5 or 

Regulation X (Real Estate Settlement 

Procedures).6 Some financial institution 

and consumer and community group 

commenters questioned the value of 

additional disclosures and expressed 

concern that the proposed statement 

would contribute to consumer 

information overload. A few 

commenters stated that the proposed 

statement would add burdensome new 

disclosure requirements and would 

result in the provision of confusing 

information to consumers. 

Some industry group commenters 

asked the Agencies to provide uniform 

disclosures for these products, or to 

publish illustrations of the consumer 

information contemplated by the 

proposed statement similar to those 

previously proposed by the Agencies in 

connection with nontraditional 

mortgage products.7 Several 

commenters also requested that any 

disclosures include the maximum 

possible monthly payment under the 

terms of the loan. 

The Agencies have determined that, 

given the growth in the market for the 

products covered by the Statement and 

the heightened legal, compliance, and 

reputation risks associated with these 

products, guidelines are needed now to 

ensure that consumers will receive the 

information they need about the 

material features of these loans. In 

addition, while the Agencies are 

sensitive to commenters’ concerns 

regarding disclosure burden, we do not 

anticipate that the information outlined 

in the Statement will result in 

additional lengthy disclosures. Rather, 

the Agencies contemplate that the 

information can be provided in a brief 

narrative format and through the use of 

examples based on hypothetical loan 

transactions. In response to requests by 

commenters, the Agencies are working 

on and expect to publish for comment 

proposed illustrations of the type of 

consumer information contemplated in 

the Statement. 

The Agencies disagree with the 

commenters who expressed concern 

that the proposed statement appears to 

establish a suitability standard under 

which lenders would be required to 

assist borrowers in choosing products 

that are appropriate to their needs and 

circumstances. These commenters 

argued that lenders are not in a position 

to determine which products are most 

suitable for borrowers, and that this 

decision should be left to borrowers 

themselves. It is not the Agencies’ intent 

to impose such a standard, nor is there 

any language in the Statement that does 

so. 

Control Systems 

While some commenters who 

addressed the control systems portion of 

the proposed statement supported the 

Agencies’ proposal, some industry 

group commenters expressed concern 

that these provisions were neither 

realistic nor practical. A few industry 

group commenters requested 

clarification of the scope of a financial 

institution’s responsibilities with regard 

to third parties. Some consumer and 

community group commenters 

requested uniform regulation of and 

increased enforcement against third 

parties. 

The Agencies have carefully 

considered these comments, but have 

not revised this portion of the proposed 

statement. The Agencies do not expect 

institutions to assume an unwarranted 

level of responsibility for the actions of 

third parties. Moreover, the control 

systems discussed in the Statement are 

consistent with the Agencies’ current 

supervisory authority and policies. 

Supervisory Review 

The Agencies received no comments 

on the supervisory review portion of the 

proposed statement. However, minor 

changes have been made to clarify the 

circumstances under which the 

Agencies will take action against 

institutions in connection with the 

products addressed in the Statement. 

IV. Text of Final Joint Guidance 

The final interagency Statement on 

Subprime Mortgage Lending appears 

below. 

Statement on Subprime Mortgage 

Lending 

The Agencies 8 developed this 

Statement on Subprime Mortgage 

Lending (Subprime Statement) to 

address emerging issues and questions 

relating to certain subprime 9 mortgage 

lending practices. The Agencies are 

concerned borrowers may not fully 

understand the risks and consequences 

of obtaining products that can cause 

payment shock.10 In particular, the 

Agencies are concerned with certain 

adjustable-rate mortgage (ARM) 

products typically offered to subprime 

borrowers that have one or more of the 

following characteristics: 

• Low initial payments based on a 

fixed introductory rate that expires after 

a short period and then adjusts to a 

variable index rate plus a margin for the 

remaining term of the loan; 11

• Very high or no limits on how 

much the payment amount or the 

interest rate may increase (‘‘payment or 

rate caps’’) on reset dates; 

• Limited or no documentation of 

borrowers’ income; 

• Product features likely to result in 

frequent refinancing to maintain an 

affordable monthly payment; and/or 

• Substantial prepayment penalties 

and/or prepayment penalties that 

extend beyond the initial fixed interest 

rate period. 

Products with one or more of these 

features present substantial risks to both 

consumers and lenders. These risks are 

increased if borrowers are not 

adequately informed of the product 

features and risks, including their 

responsibility for paying real estate 

taxes and insurance, which may be 

separate from their monthly mortgage 

payments. The consequences to 

borrowers could include: being unable 


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12Federally insured credit unions should refer to 

LCU 04–CU–13—Specialized Lending Activities. 

National banks also should refer to 12 CFR 34.3(b) 

and (c), as well as 12 CFR part 30, Appendix C. 

13As with the Interagency Guidance on 

Nontraditional Mortgage Product Risks, 71 FR 

58609 (October 4, 2006), this Statement applies to 

all banks and their subsidiaries, bank holding 

companies and their nonbank subsidiaries, savings 

associations and their subsidiaries, savings and loan 

holding companies and their subsidiaries, and 

credit unions. 

14Federal credit unions should refer to 12 CFR 

740.2 and 12 CFR 706 for information on prohibited 

practices. 

15The OCC, the Board, the OTS, and the FDIC 

enforce this provision under section 8 of the 

Federal Deposit Insurance Act. The OCC, Board, 

and FDIC also have issued supervisory guidance to 

the institutions under their respective jurisdictions 

concerning unfair or deceptive acts or practices. See 

OCC Advisory Letter 2002–3—Guidance on Unfair 

or Deceptive Acts or Practices, March 22, 2002, and 

12 CFR part 30, Appendix C; Joint Board and FDIC 

Guidance on Unfair or Deceptive Acts or Practices 

by State-Chartered Banks, March 11, 2004. The OTS 

also has issued a regulation that prohibits savings 

associations from using advertisements or other 

representations that are inaccurate or misrepresent 

the services or contracts offered (12 CFR 563.27). 

The NCUA prohibits federally insured credit unions 

from using any advertising or promotional material 

that is inaccurate, misleading, or deceptive in any 

way concerning its products, services, or financial 

condition (12 CFR 740.2). 

16Refer to 12 CFR part 34, subpart D (OCC); 12 

CFR part 208, subpart C (Board); 12 CFR part 365 

(FDIC); 12 CFR 560.100 and 12 CFR 560.101 (OTS); 

and 12 CFR 701.21 (NCUA). 

17OTS Examination Handbook Section 212, 1–4 

Family Residential Mortgage Lending, also 

discusses borrower qualification standards. 

Federally insured credit unions should refer to LCU 

04–CU–13—Specialized Lending Activities. 

18The fully indexed rate equals the index rate 

prevailing at origination plus the margin to be 

added to it after the expiration of an introductory 

interest rate. For example, assume that a loan with 

an initial fixed rate of 7% will reset to the sixmonth London Interbank Offered Rate (LIBOR) plus 

a margin of 6%. If the six-month LIBOR rate equals 

5.5%, lenders should qualify the borrower at 11.5% 

(5.5% + 6%), regardless of any interest rate caps 

that limit how quickly the fully indexed rate may 

be reached. 

19The fully amortizing payment schedule should 

be based on the term of the loan. For example, the 

amortizing payment for a ‘‘2/28’’ loan would be 

calculated based on a 30-year amortization 

schedule. For balloon mortgages that contain a 

borrower option for an extended amortization 

period, the fully amortizing payment schedule can 

be based on the full term the borrower may choose. 

to afford the monthly payments after the 

initial rate adjustment because of 

payment shock; experiencing difficulty 

in paying real estate taxes and insurance 

that were not escrowed; incurring 

expensive refinancing fees, frequently 

due to closing costs and prepayment 

penalties, especially if the prepayment 

penalty period extends beyond the rate 

adjustment date; and losing their homes. 

Consequences to lenders may include 

unwarranted levels of credit, legal, 

compliance, reputation, and liquidity 

risks due to the elevated risks inherent 

in these products. 

The Agencies note that many of these 

concerns are addressed in existing 

interagency guidance. The most 

prominent are the 1993 Interagency 

Guidelines for Real Estate Lending (Real 

Estate Guidelines), the 1999 Interagency 

Guidance on Subprime Lending, and the 

2001 Expanded Guidance for Subprime 

Lending Programs (Expanded Subprime 

Guidance).12

While the 2006 Interagency Guidance 

on Nontraditional Mortgage Product 

Risks (NTM Guidance) may not 

explicitly pertain to products with the 

characteristics addressed in this 

Statement, it outlines prudent 

underwriting and consumer protection 

principles that institutions also should 

consider with regard to subprime 

mortgage lending. This Statement 

reiterates many of the principles 

addressed in existing guidance relating 

to prudent risk management practices 

and consumer protection laws.13

Risk Management Practices 

Predatory Lending Considerations 

Subprime lending is not synonymous 

with predatory lending, and loans with 

the features described above are not 

necessarily predatory in nature. 

However, institutions should ensure 

that they do not engage in the types of 

predatory lending practices discussed in 

the Expanded Subprime Guidance.14

Typically, predatory lending involves at 

least one of the following elements: 

• Making loans based predominantly 

on the foreclosure or liquidation value 

of a borrower’s collateral rather than on 

the borrower’s ability to repay the 

mortgage according to its terms; 

• Inducing a borrower to repeatedly 

refinance a loan in order to charge high 

points and fees each time the loan is 

refinanced (‘‘loan flipping’’); or 

• Engaging in fraud or deception to 

conceal the true nature of the mortgage 

loan obligation, or ancillary products, 

from an unsuspecting or 

unsophisticated borrower. 

Institutions offering mortgage loans 

such as these face an elevated risk that 

their conduct will violate Section 5 of 

the Federal Trade Commission Act (FTC 

Act), which prohibits unfair or 

deceptive acts or practices.15

Underwriting Standards 

Institutions should refer to the Real 

Estate Guidelines, which provide 

underwriting standards for all real estate 

loans.16 The Real Estate Guidelines state 

that prudently underwritten real estate 

loans should reflect all relevant credit 

factors, including the capacity of the 

borrower to adequately service the 

debt.17 The 2006 NTM Guidance details 

similar criteria for qualifying borrowers 

for products that may result in payment 

shock. 

Prudent qualifying standards 

recognize the potential effect of 

payment shock in evaluating a 

borrower’s ability to service debt. An 

institution’s analysis of a borrower’s 

repayment capacity should include an 

evaluation of the borrower’s ability to 

repay the debt by its final maturity at 

the fully indexed rate,18 assuming a 

fully amortizing repayment schedule.19

One widely accepted approach in the 

mortgage industry is to quantify a 

borrower’s repayment capacity by a 

debt-to-income (DTI) ratio. An 

institution’s DTI analysis should 

include, among other things, an 

assessment of a borrower’s total 

monthly housing-related payments (e.g., 

principal, interest, taxes, and insurance, 

or what is commonly known as PITI) as 

a percentage of gross monthly income. 

This assessment is particularly 

important if the institution relies upon 

reduced documentation or allows other 

forms of risk layering. Risk-layering 

features in a subprime mortgage loan 

may significantly increase the risks to 

both the institution and the borrower. 

Therefore, an institution should have 

clear policies governing the use of risklayering features, such as reduced 

documentation loans or simultaneous 

second lien mortgages. When risklayering features are combined with a 

mortgage loan, an institution should 

demonstrate the existence of effective 

mitigating factors that support the 

underwriting decision and the 

borrower’s repayment capacity. 

Recognizing that loans to subprime 

borrowers present elevated credit risk, 

institutions should verify and document 

the borrower’s income (both source and 

amount), assets and liabilities. Stated 

income and reduced documentation 

loans to subprime borrowers should be 

accepted only if there are mitigating 

factors that clearly minimize the need 

for direct verification of repayment 

capacity. Reliance on such factors also 

should be documented. Typically, 

mitigating factors arise when a borrower 

with favorable payment performance 

seeks to refinance an existing mortgage 

with a new loan of a similar size and 

with similar terms, and the borrower’s 

financial condition has not deteriorated. 

Other mitigating factors might include 

situations where a borrower has 

substantial liquid reserves or assets that 


jlentini on PROD1PC65 with NOTICES
37574 Federal Register / Vol. 72, No. 131 / Tuesday, July 10, 2007 / Notices 

20 Institutions may need to account for workout 

arrangements as troubled debt restructurings and 

should follow generally accepted accounting 

principles in accounting for these transactions. 

21Federal credit unions are prohibited from 

charging prepayment penalties. 12 CFR 701.21. 22 Institutions generally can address these 

concerns most directly by requiring borrowers to 

escrow funds for real estate taxes and insurance. 23To illustrate: a borrower earning $42,000 per 

year obtains a $200,000 ‘‘2/28’’ mortgage loan. The 

loan’s two-year introductory fixed interest rate of 

7% requires a principal and interest payment of 

$1,331. Escrowing $200 per month for taxes and 

insurance results in a total monthly payment of 

$1,531 ($1,331 + $200), representing a 44% DTI 

ratio. A fully indexed interest rate of 11.5% (based 

on a six-month LIBOR index rate of 5.5% plus a 6% 

margin) would cause the borrower’s principal and 

interest payment to increase to $1,956. The adjusted 

total monthly payment of $2,156 ($1,956 + $200 for 

taxes and insurance) represents a 41% increase in 

the payment amount and results in a 62% DTI ratio. 

24See footnote 21. 

demonstrate repayment capacity and 

can be verified and documented by the 

lender. However, a higher interest rate 

is not considered an acceptable 

mitigating factor. 

Workout Arrangements 

As discussed in the April 2007 

interagency Statement on Working with 

Borrowers, the Agencies encourage 

financial institutions to work 

constructively with residential 

borrowers who are in default or whose 

default is reasonably foreseeable. 

Prudent workout arrangements that are 

consistent with safe and sound lending 

practices are generally in the long-term 

best interest of both the financial 

institution and the borrower. 

Financial institutions should follow 

prudent underwriting practices in 

determining whether to consider a loan 

modification or a workout 

arrangement.20 Such arrangements can 

vary widely based on the borrower’s 

financial capacity. For example, an 

institution might consider modifying 

loan terms, including converting loans 

with variable rates into fixed-rate 

products to provide financially stressed 

borrowers with predictable payment 

requirements. 

The Agencies will not criticize 

financial institutions that pursue 

reasonable workout arrangements with 

borrowers. Further, existing supervisory 

guidance and applicable accounting 

standards do not require institutions to 

immediately foreclose on the collateral 

underlying a loan when the borrower 

exhibits repayment difficulties. 

Institutions should identify and report 

credit risk, maintain an adequate 

allowance for loan losses, and recognize 

credit losses in a timely manner. 

Consumer Protection Principles 

Fundamental consumer protection 

principles relevant to the underwriting 

and marketing of mortgage loans 

include: 

• Approving loans based on the 

borrower’s ability to repay the loan 

according to its terms; and 

• Providing information that enables 

consumers to understand material 

terms, costs, and risks of loan products 

at a time that will help the consumer 

select a product. 

Communications with consumers, 

including advertisements, oral 

statements, and promotional materials, 

should provide clear and balanced 

information about the relative benefits 

and risks of the products. This 

information should be provided in a 

timely manner to assist consumers in 

the product selection process, not just 

upon submission of an application or at 

consummation of the loan. Institutions 

should not use such communications to 

steer consumers to these products to the 

exclusion of other products offered by 

the institution for which the consumer 

may qualify. 

Information provided to consumers 

should clearly explain the risk of 

payment shock and the ramifications of 

prepayment penalties, balloon 

payments, and the lack of escrow for 

taxes and insurance, as necessary. The 

applicability of prepayment penalties 

should not exceed the initial reset 

period. In general, borrowers should be 

provided a reasonable period of time 

(typically at least 60 days prior to the 

reset date) to refinance without 

penalty.21

Similarly, if borrowers do not 

understand that their monthly mortgage 

payments do not include taxes and 

insurance, and they have not budgeted 

for these essential homeownership 

expenses, they may be faced with the 

need for significant additional funds on 

short notice.22 Therefore, mortgage 

product descriptions and 

advertisements should provide clear, 

detailed information about the costs, 

terms, features, and risks of the loan to 

the borrower. Consumers should be 

informed of: 

• Payment Shock. Potential payment 

increases, including how the new 

payment will be calculated when the 

introductory fixed rate expires.23

• Prepayment Penalties. The 

existence of any prepayment penalty, 

how it will be calculated, and when it 

may be imposed.24

• Balloon Payments. The existence of 

any balloon payment. 

• Cost of Reduced Documentation 

Loans. Whether there is a pricing 

premium attached to a reduced 

documentation or stated income loan 

program. 

• Responsibility for Taxes and 

Insurance. The requirement to make 

payments for real estate taxes and 

insurance in addition to their loan 

payments, if not escrowed, and the fact 

that taxes and insurance costs can be 

substantial. 

Control Systems 

Institutions should develop strong 

control systems to monitor whether 

actual practices are consistent with their 

policies and procedures. Systems 

should address compliance and 

consumer information concerns, as well 

as safety and soundness, and encompass 

both institution personnel and 

applicable third parties, such as 

mortgage brokers or correspondents. 

Important controls include 

establishing appropriate criteria for 

hiring and training loan personnel, 

entering into and maintaining 

relationships with third parties, and 

conducting initial and ongoing due 

diligence on third parties. Institutions 

also should design compensation 

programs that avoid providing 

incentives for originations inconsistent 

with sound underwriting and consumer 

protection principles, and that do not 

result in the steering of consumers to 

these products to the exclusion of other 

products for which the consumer may 

qualify. 

Institutions should have procedures 

and systems in place to monitor 

compliance with applicable laws and 

regulations, third-party agreements and 

internal policies. An institution’s 

controls also should include appropriate 

corrective actions in the event of failure 

to comply with applicable laws, 

regulations, third-party agreements or 

internal policies. In addition, 

institutions should initiate procedures 

to review consumer complaints to 

identify potential compliance problems 

or other negative trends. 

Supervisory Review 

The Agencies will continue to 

carefully review risk management and 

consumer compliance processes, 

policies, and procedures. The Agencies 

will take action against institutions that 

exhibit predatory lending practices, 

violate consumer protection laws or fair 

lending laws, engage in unfair or 

deceptive acts or practices, or otherwise 

engage in unsafe or unsound lending 

practices. 


jlentini on PROD1PC65 with NOTICES
Federal Register / Vol. 72, No. 131 / Tuesday, July 10, 2007 / Notices 37575 

Dated: June 28, 2007. 

John C. Dugan, 

Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, June 28, 2007. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated at Washington, DC, the 27th day of 

June, 2007. 

By order of the Federal Deposit Insurance 

Corporation. 

Robert E. Feldman, 

Executive Secretary. 

Dated: June 28, 2007. 

By the Office of Thrift Supervision. 

John Reich, 

Director. 

Dated: June 28, 2007. 

By the National Credit Union 

Administration. 

JoAnn M. Johnson, 

Chairman. 

[FR Doc. 07–3316 Filed 7–9–07; 8:45 am] 

BILLING CODE 4810–33–P (20%); 6210–01–P (20%); 

6714–01–P (20%); 6720–01–P (20%) 7535–01–P (20%) 

DEPARTMENT OF THE TREASURY 

Bureau of the Public Debt 

Proposed Collection: Comment 

Request 

ACTION: Notice and request for 

comments. 

SUMMARY: The Department of the 

Treasury, as part of its continuing effort 

to reduce paperwork and respondent 

burden, invites the general public and 

other Federal agencies to take this 

opportunity to comment on proposed 

and/or continuing information 

collections, as required by the 

Paperwork Reduction Act of 1995, 

Public Law 104–13 (44 U.S.C. 

3506(c)(2)(A)). Currently the Bureau of 

the Public Debt within the Department 

of the Treasury is soliciting comments 

concerning the resolution for 

transactions involving registered 

securities. 

DATES: Written comments should be 

received on or before September 11, 

2007, to be assured of consideration. 

ADDRESSES: Direct all written comments 

to Bureau of the Public Debt, Vicki S. 

Thorpe, 200 Third Street, A4–A, 

Parkersburg, WV 26106–1328, or 

Vicki.Thorpe@bpd.treas.gov. 

FOR FURTHER INFORMATION CONTACT: 

Requests for additional information or 

copies of the form and instructions 

should be directed to Vicki S. Thorpe, 

Bureau of the Public Debt, 200 Third 

Street, A4–A, Parkersburg, WV 26106–

1328, (304) 480–8150. 

SUPPLEMENTARY INFORMATION: 

Title: Resolution for Transactions 

Involving Registered Securities. 

OMB Number: 1535–0117. 

Form Number: PD F 1010. 

Abstract: The information is 

requested to establish the official’s 

authority to act on behalf of the 

organization. 

Current Actions: None. 

Type of Review: Extension. 

Affected Public: Business or other for 

profit. 

Estimated Number of Respondents: 

500. 

Estimated Time Per Respondent: 10 

minutes. 

Estimated Total Annual Burden 

Hours: 85. 

Request for Comments: Comments 

submitted in response to this notice will 

be summarized and/or included in the 

request for OMB approval. All 

comments will become a matter of 

public record. Comments are invited on: 

(a) Whether the collection of 

information is necessary for the proper 

performance of the functions of the 

agency, including whether the 

information shall have practical utility; 

(b) the accuracy of the agency’s estimate 

of the burden of the collection of 

information; (c) ways to enhance the 

quality, utility, and clarity of the 

information to be collected; (d) ways to 

minimize the burden of the collection of 

information on respondents, including 

through the use of automated collection 

techniques or other forms of information 

technology; and (e) estimates of capital 

or start-up costs and costs of operation, 

maintenance, and purchase of services 

to provide information. 

Dated: July 3, 2007. 

Vicki S. Thorpe, 

Manager, Graphics, Printing and Records 

Branch. 

[FR Doc. E7–13373 Filed 7–9–07; 8:45 am] 

BILLING CODE 4810–39–P 

DEPARTMENT OF VETERANS 

AFFAIRS 

[OMB Control No. 2900–0698] 

Agency Information Collection 

Activities Under OMB Review 

AGENCY: Veterans Benefits 

Administration, Department of Veterans 

Affairs. 

ACTION: Notice. 

SUMMARY: In compliance with the 

Paperwork Reduction Act (PRA) of 1995 

(44 U.S.C. 3501–3521), this notice 

announces that the Veterans Benefits 

Administration (VBA), Department of 

Veterans Affairs, has submitted the 

collection of information abstracted 

below to the Office of Management and 

Budget (OMB) for review and comment. 

The PRA submission describes the 

nature of the information collection and 

its expected cost and burden; it includes 

the actual data collection instrument. 

DATES: Comments must be submitted on 

or before August 9, 2007. 

ADDRESSES: Submit written comments 

on the collection of information through 

http://www.Regulations.gov or to VA’s 

OMB Desk Officer, OMB Human 

Resources and Housing Branch, New 

Executive Office Building, Room 10235, 

Washington, DC 20503 (202) 395–7316. 

Please refer to ‘‘OMB Control No. 2900–

0698’’ in any correspondence. 

FOR FURTHER INFORMATION CONTACT: 

Denise McLamb, Records Management 

Service (005G2), Department of Veterans 

Affairs, 810 Vermont Avenue, NW., 

Washington, DC 20420, (202) 565–8374, 

FAX (202) 565–7870 or e-mail 

denise.mclamb@mail.va.gov. Please 

refer to ‘‘OMB Control No. 2900–0698.’’

SUPPLEMENTARY INFORMATION: 

Title: Application for Educational 

Assistance to Supplement Tuition 

Assistance; 38 CFR 21.1030(c), 

21.7140(c)(5). 

OMB Control Number: 2900–0698. 

Type of Review: Extension of a 

currently approved collection. 

Abstract: Claimants who wish to 

receive educational assistance 

administered by VA to supplement 

tuition assistance administered by the 

Department of Defense must apply to 

VA. VA will use the data collected to 

determine the claimant’s eligibility to 

receive educational assistance to 

supplement the tuition assistance he or 

she has received and the amount 

payable. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to a collection of information 

unless it displays a currently valid OMB 

control number. The Federal Register 

Notice with a 60-day comment period 

soliciting comments on this collection 

of information was published on April 

18, 2007, at page 19587. 

Affected Public: Not-for-profit 

institutions. 

Estimated Annual Burden: 3,000 

hours. 

Frequency of Response: On occasion. 

Estimated Average Burden per 

Respondent: 12 minutes. 

Estimated Annual Responses: 15,000. 

Dated: June 26, 2007. 


jlentini on PROD1PC65 with NOTICES