Since most borrowers can't come up with this kind of money, they agree to roll it into the loan balance, which simply increases their indebtedness and, as a result, the risk of default. To date, we have not bought any subprime mortgages where credit life has been financed out of the loan proceeds. However, sometimes we see deals with very little or this product. It is hard for us to say that it is all predatory in that situation. In any event, we are engaging in intensive study because we want to do the right thing for the right reason.
Prepayment penalties present another tough issue.
The very high prepayment speeds characteristic of subprime lending have spawned the broad use of prepayment penalties. Used correctly, prepayment penalty loans can offer borrowers a lower rate in exchange for staying in the loan for a given period of time, which can be a very good deal for some borrowers. But prepayment penalty loans can become predatory. Our first step toward curbing the abusive use of this product is to standardize and limit the level of the penalty and the length of time it is in effect. We are also putting in place borrower safeguards.