Mississippi Administrative Code › Title 5 - Banking and Consumer Finance › Part 2 - Mortgage Company Activities › Chapter 1 - Mississippi S.A.F.E. Mortgage Act › Rule 5-2-1.11 - Guidelines on Nontraditional Mortgage Product Risks

Current through June 25, 2024
The Department is incorporating the Conference of State Bank
				  Supervisors and the American Association of Residential Mortgage Regulators
				  "Guidance on Nontraditional Mortgage Products Risks", which was issued on
				  November 14, 2006, into Department Regulations. In addition, this Guidance will
				  be incorporated into the Examination of all licensed Mortgage Brokers and
				  Mortgage Lenders.
GUIDANCE ON NONTRADITIONAL MORTGAGE PRODUCT
				  RISKS
I.
INTRODUCTION
On October 4, 2006, the Office of the Comptroller of the
				  Currency (OCC), the Board of Governors of the Federal Reserve System (Board),
				  the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift
				  Supervision (OTS), and the National Credit Union Administration (NCUA)
				  (collectively, the Agencies) published final guidance in the
Federal
				  Register
(Volume 71, Number 192, Page 58609-58618) on nontraditional
				  mortgage product risks ("interagency guidance"). The interagency guidance
				  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.
Recognizing that the interagency guidance does not cover a
				  majority of loan originations, on June 7, 2006 the Conference of State Bank
				  Supervisors (CSBS) and the American Association of Residential Mortgage
				  Regulators (AARMR) announced their intent to develop parallel guidance.
Both CSBS and AARMR strongly support the purpose of the
				  guidance adopted by the Agencies and are committed to promote uniform
				  application of its consumer protections for all borrowers.
The following guidance will assist state regulators of
				  mortgage brokers and mortgage companies (referred to as "providers") not
				  affiliated with a bank holding company or an insured financial institution to
				  promote consistent regulation in the mortgage market and clarify how providers
				  can offer nontraditional mortgage products in a way that clearly discloses the
				  risks that borrowers may assume.
In order to maintain regulatory consistency, this guidance
				  substantially mirrors the interagency guidance, except for the deletion of
				  sections not applicable to non-depository institutions.
II.
BACKGROUND
The Agencies developed their 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 during a later amortization period.
While similar products have been available for many years,
				  the number of institutions and providers offering them has expanded rapidly. At
				  the same time, these products are offered to a wider spectrum of borrowers who
				  may not otherwise qualify for more traditional mortgages. CSBS and AARMR are
				  concerned that some borrowers may not fully understand the risks of these
				  products. While many of these risks exist in other adjustable-rate mortgage
				  products, the concern of CSBS and AARMR is elevated with nontraditional
				  products because of the lack of principal amortization and potential for
				  negative amortization. In addition, providers are increasingly combining these
				  loans with other features that may compound risk. These features include
				  simultaneous second-lien mortgages and the use of reduced documentation in
				  evaluating an applicant's creditworthiness.
III.
TEXT OF FINAL CSBS-AARMR
				GUIDANCE
The text of the final CSBS-AARMR Guidance on Nontraditional
				  Mortgage Product Risks follows:
CSBS-AARMR GUIDANCE ON NONTRADITIONAL MORTGAGE PRODUCT
				  RISKS
Residential mortgage lending has traditionally been a
				  conservatively managed business with low delinquencies and losses and
				  reasonably stable underwriting standards. In the past few years consumer demand
				  has been growing, particularly in high priced real estate markets, for
				  closed-end residential mortgage loan products that allow borrowers to defer
				  repayment of principal and, sometimes, interest. These mortgage products,
				  herein referred to as nontraditional mortgage loans, include such products as
				  "interest-only" mortgages where a borrower pays no loan principal for the first
				  few years of the loan and "payment option" adjustable-rate mortgages (ARMs)
				  where a borrower has flexible payment options with the potential for negative
				  amortization.1
While some providers have offered nontraditional mortgages
				  for many years with appropriate risk management, the market for these products
				  and the number of providers offering them has expanded rapidly. Nontraditional
				  mortgage loan products are now offered by more lenders to a wider spectrum of
				  borrowers who may not otherwise qualify for more traditional mortgage loans and
				  may not fully understand the associated risks.
Many of these nontraditional mortgage loans are underwritten
				  with less stringent income and asset verification requirements ("reduced
				  documentation") and are increasingly combined with simultaneous second-lien
				  loans.2 Such risk layering, combined with the
				  broader marketing of nontraditional mortgage loans, exposes providers to
				  increased risk relative to traditional mortgage loans.
Given the potential for heightened risk levels, management
				  should carefully consider and appropriately mitigate exposures created by these
				  loans. To manage the risks associated with nontraditional mortgage loans,
				  management should:
* Ensure that loan terms and underwriting standards are
				  consistent with prudent lending practices, including consideration of a
				  borrower's repayment capacity; and
* Ensure that consumers have sufficient information to
				  clearly understand loan terms and associated risks prior to making a product
				  choice.
The Mississippi Department of Banking and Consumer Finance
				  expects providers to effectively assess and manage the risks associated with
				  nontraditional mortgage loan products.
Providers should use this guidance to ensure that risk
				  management practices adequately address these risks. The Mississippi Department
				  of Banking and Consumer Finance will carefully scrutinize risk management
				  processes, policies, and procedures in this area. Providers that do not
				  adequately manage these risks will be asked to take remedial action.
The focus of this guidance is on the higher risk elements of
				  certain nontraditional mortgage products, not the product type itself.
				  Providers with sound underwriting, and adequate risk management will not be
				  subject to criticism merely for offering such products.
Loan Terms and Underwriting Standards
When a provider offers nontraditional mortgage loan products,
				  underwriting standards should address the effect of a substantial payment
				  increase on the borrower's capacity to repay when loan amortization
				  begins.
Central to prudent lending is the internal discipline to
				  maintain sound loan terms and underwriting standards despite competitive
				  pressures. Providers are strongly cautioned against ceding underwriting
				  standards to third parties that have different business objectives, risk
				  tolerances, and core competencies. Loan terms should be based on a disciplined
				  analysis of potential exposures and compensating factors to ensure risk levels
				  remain manageable.
Qualifying Borrowers
-Payments on nontraditional
				  loans can increase significantly when the loans begin to amortize. Commonly
				  referred to as payment shock, this increase is of particular concern for
				  payment option ARMs where the borrower makes minimum payments that may result
				  in negative amortization. Some providers manage the potential for excessive
				  negative amortization and payment shock by structuring the initial terms to
				  limit the spread between the introductory interest rate and the fully indexed
				  rate. Nevertheless, a provider's qualifying standards should recognize the
				  potential impact of payment shock, especially for borrowers with high
				  loan-to-value (LTV) ratios, high debt-to-income (DTI) ratios, and low credit
				  scores. Recognizing that a provider's underwriting criteria are based on
				  multiple factors, a provider should consider these factors jointly in the
				  qualification process and may develop a range of reasonable tolerances for each
				  factor. However, the criteria should be based upon prudent and appropriate
				  underwriting standards, considering both the borrower's characteristics and the
				  product's attributes.
For all nontraditional mortgage loan products, a provider's
				  analysis of a borrower's repayment capacity should include an evaluation of
				  their ability to repay the debt by final maturity at the fully indexed
				  rate,3 assuming a fully amortizing repayment
				  schedule.4 In addition, for products that permit
				  negative amortization, the repayment analysis should be based upon the initial
				  loan amount plus any balance increase that may accrue from the negative
				  amortization provision.5
Furthermore, the analysis of repayment capacity should avoid
				  over-reliance on credit scores as a substitute for income verification in the
				  underwriting process. The higher a loan's credit risk, either from loan
				  features or borrower characteristics, the more important it is to verify the
				  borrower's income, assets, and outstanding liabilities.
Collateral-Dependent Loans
-Providers should
				  avoid the use of loan terms and underwriting practices that may heighten the
				  need for a borrower to rely on the sale or refinancing of the property once
				  amortization begins. Loans to individuals who do not demonstrate the capacity
				  to repay, as structured, from sources other than the collateral pledged may be
				  unfair and abusive.6 Providers that originate
				  collateral-dependent mortgage loans may be subject to criticism and corrective
				  action.
Risk Layering
-Providers that originate or
				  purchase mortgage loans that combine nontraditional features, such as interest
				  only loans with reduced documentation or a simultaneous second-lien loan, face
				  increased risk. When features are layered, a provider should demonstrate that
				  mitigating factors support the underwriting decision and the borrower's
				  repayment capacity. Mitigating factors could include higher credit scores,
				  lower LTV and DTI ratios, significant liquid assets, mortgage insurance or
				  other credit enhancements. While higher pricing is often used to address
				  elevated risk levels, it does not replace the need for sound
				  underwriting.
Reduced Documentation
-Providers increasingly
				  rely on reduced documentation, particularly unverified income, to qualify
				  borrowers for nontraditional mortgage loans. Because these practices
				  essentially substitute assumptions and unverified information for analysis of a
				  borrower's repayment capacity and general creditworthiness, they should be used
				  with caution. As the level of credit risk increases, it is expected that a
				  provider will more diligently verify and document a borrower's income and debt
				  reduction capacity. Clear policies should govern the use of reduced
				  documentation. For example, stated income should be accepted only if there are
				  mitigating factors that clearly minimize the need for direct verification of
				  repayment capacity. For many borrowers, providers generally should be able to
				  readily document income using recent W-2 statements, pay stubs, or tax
				  returns.
Simultaneous Second-Lien Loans
-Simultaneous
				  second-lien loans reduce owner equity and increase credit risk. Historically,
				  as combined loan-to-value ratios rise, so do defaults. A delinquent borrower
				  with minimal or no equity in a property may have little incentive to work with
				  a lender to bring the loan current and avoid foreclosure. In addition,
				  second-lien home equity lines of credit (HELOCs) typically increase borrower
				  exposure to increasing interest rates and monthly payment burdens. Loans with
				  minimal or no owner equity generally should not have a payment structure that
				  allows for delayed or negative amortization without other significant risk
				  mitigating factors.
Introductory Interest Rates
-Many providers offer
				  introductory interest rates set well below the fully indexed rate as a
				  marketing tool for payment option ARM products. When developing nontraditional
				  mortgage product terms, a provider should consider the spread between the
				  introductory rate and the fully indexed rate. Since initial and subsequent
				  monthly payments are based on these low introductory rates, a wide initial
				  spread means that borrowers are more likely to experience negative
				  amortization, severe payment shock, and an earlier-than-scheduled recasting of
				  monthly payments. Providers should minimize the likelihood of disruptive early
				  recastings and extraordinary payment shock when setting introductory
				  rates.
Lending to Subprime Borrowers
-Providers of
				  mortgage programs that target subprime borrowers through tailored marketing,
				  underwriting standards, and risk selection should ensure that such programs do
				  not feature terms that could become predatory or abusive. They should also
				  recognize that risk-layering features in loans to subprime borrowers may
				  significantly increase risks for both the provider and the borrower.
Non-Owner-Occupied Investor Loans
-Borrowers
				  financing non-owner-occupied investment properties should qualify for loans
				  based on their ability to service the debt over the life of the loan. Loan
				  terms should reflect an appropriate combined LTV ratio that considers the
				  potential for negative amortization and maintains sufficient borrower equity
				  over the life of the loan. Further, underwriting standards should require
				  evidence that the borrower has sufficient cash reserves to service the loan,
				  considering the possibility of extended periods of property vacancy and the
				  variability of debt service requirements associated with nontraditional
				  mortgage loan products.
Risk Management Practices
Providers should ensure that risk management practices keep
				  pace with the growth of nontraditional mortgage products and changes in the
				  market. Providers that originate or invest in nontraditional mortgage loans
				  should adopt more robust risk management practices and manage these exposures
				  in a thoughtful, systematic manner. To meet these expectations, providers
				  should:
* Develop written policies that specify acceptable product
				  attributes, production, sales and securitization practices, and risk management
				  expectations; and
* Design enhanced performance measures and management
				  reporting that provide early warning for increasing risk.
Policies
-A provider's policies for
				  nontraditional mortgage lending activity should set acceptable levels of risk
				  through its operating practices and policy exception tolerances. Policies
				  should reflect appropriate limits on risk layering and should include risk
				  management tools for risk mitigation purposes. Further, a provider should set
				  growth and volume limits by loan type, with special attention for products and
				  product combinations in need of heightened attention due to easing terms or
				  rapid growth.
Concentrations
-Providers with concentrations in
				  nontraditional mortgage products should have well-developed monitoring systems
				  and risk management practices. Further, providers should consider the effect of
				  employee and third party incentive programs that could produce higher
				  concentrations of nontraditional mortgage loans. Concentrations that are not
				  effectively managed will be subject to elevated supervisory attention and
				  potential examiner criticism to ensure timely remedial action.
Controls
-A provider's quality control,
				  compliance, and audit procedures should focus on mortgage lending activities
				  posing high risk. Controls to monitor compliance with underwriting standards
				  and exceptions to those standards are especially important for nontraditional
				  loan products. The quality control function should regularly review a sample of
				  nontraditional mortgage loans from all origination channels and a
				  representative sample of underwriters to confirm that policies are being
				  followed. When control systems or operating practices are found deficient,
				  business-line managers should be held accountable for correcting deficiencies
				  in a timely manner.
Third-Party Originations
-Providers often use
				  third parties, such as mortgage brokers or correspondents, to originate
				  nontraditional mortgage loans. Providers should have strong systems and
				  controls in place for establishing and maintaining relationships with third
				  parties, including procedures for performing due diligence. Oversight of third
				  parties should involve monitoring the quality of originations so that they
				  reflect the provider's lending standards and compliance with applicable laws
				  and regulations.
Monitoring procedures should track the quality of loans by
				  both origination source and key borrower characteristics. This will help
				  providers identify problems such as early payment defaults, incomplete
				  documentation, and fraud. If appraisal, loan documentation, credit problems or
				  consumer complaints are discovered, the provider should take immediate action.
				  Remedial action could include more thorough application reviews, more frequent
				  re-underwriting, or even termination of the third-party relationship.
Secondary Market Activity
-The sophistication of
				  a provider's secondary market risk management practices should be commensurate
				  with the nature and volume of activity. Providers with significant secondary
				  market activities should have comprehensive, formal strategies for managing
				  risks. Contingency planning should include how the provider will respond to
				  reduced demand in the secondary market.
While third-party loan sales can transfer a portion of the
				  credit risk, a provider remains exposed to reputation risk when credit losses
				  on sold mortgage loans or securitization transactions exceed expectations. As a
				  result, a provider may determine that it is necessary to repurchase defaulted
				  mortgages to protect its reputation and maintain access to the markets.
Consumer Protection Issues
While nontraditional mortgage loans provide flexibility for
				  consumers, the Mississippi Department of Banking and Consumer Finance is
				  concerned that consumers may enter into these transactions without fully
				  understanding the product terms. Nontraditional mortgage products have been
				  advertised and promoted based on their affordability in the near term; that is,
				  their lower initial monthly payments compared with traditional types of
				  mortgages. In addition to apprising consumers of the benefits of nontraditional
				  mortgage products, providers should take appropriate steps to alert consumers
				  to the risks of these products, including the likelihood of increased future
				  payment obligations. This information should be provided in a timely manner
				  before disclosures may be required under the Truth in Lending Act or other
				  lawsto assist the consumer in the product selection process.
Concerns and Objectives
-More than traditional
				  ARMs, mortgage products such as payment option ARMs and interest-only mortgages
				  can carry a significant risk of payment shock and negative amortization that
				  may not be fully understood by consumers. For example, consumer payment
				  obligations may increase substantially at the end of an interest-only period or
				  upon the "recast" of a payment option ARM. The magnitude of these payment
				  increases may be affected by factors such as the expiration of promotional
				  interest rates, increases in the interest rate index, and negative
				  amortization. Negative amortization also results in lower levels of home equity
				  as compared to a traditional amortizing mortgage product. When borrowers go to
				  sell or refinance the property, they may find that negative amortization has
				  substantially reduced or eliminated their equity in it even when the property
				  has appreciated. The concern that consumers may not fully understand these
				  products would be exacerbated by marketing and promotional practices that
				  emphasize potential benefits without also providing clear and balanced
				  information about material risks.
In light of these considerations, communications with
				  consumers, including advertisements, oral statements, promotional materials,
				  and monthly statements should provide clear and balanced information about the
				  relative benefits and risks of these products, including the risk of payment
				  shock and the risk of negative amortization. Clear, balanced, and timely
				  communication to consumers of the risks of these products will provide
				  consumers with useful information at crucial decision-making points, such as
				  when they are shopping for loans or deciding which monthly payment amount to
				  make. Such communication should help minimize potential consumer confusion and
				  complaints, foster good customer relations, and reduce legal and other risks to
				  the provider.
Legal Risks-
Providers that offer nontraditional
				  mortgage products must ensure that they do so in a manner that complies with
				  all applicable laws and regulations. With respect to the disclosures and other
				  information provided to consumers, applicable laws and regulations include the
				  following:
* Truth in Lending Act (TILA) and its implementing
				  regulation, Regulation Z.
* Section 5 of the Federal Trade Commission Act (FTC
				  Act).
TILA and Regulation Z contain rules governing disclosures
				  that providers must provide for closed-end mortgages in advertisements, with an
				  application,7 before loan consummation, and when
				  interest rates change. Section 5 of the FTC Act prohibits unfair or deceptive
				  acts or practices.
Other federal laws, including the fair lending laws and the
				  Real Estate Settlement Procedures Act (RESPA), also apply to these
				  transactions. Moreover, the sale or securitization of a loan may not affect a
				  provider's potential liability for violations of TILA, RESPA, the FTC Act, or
				  other laws in connection with its origination of the loan. State laws,
				  including laws regarding unfair or deceptive acts or practices, may
				  apply.
Recommended Practices
Recommended practices for addressing the risks raised by
				  nontraditional mortgage products include the
				  following:8
Communications with Consumers
-When promoting or
				  describing nontraditional mortgage products, providers should give consumers
				  information that is designed to help them make informed decisions when
				  selecting and using these products. Meeting this objective requires appropriate
				  attention to the timing, content, and clarity of information presented to
				  consumers. Thus, providers should give consumers information at a time that
				  will help consumers select products and choose among payment options. For
				  example, providers should offer clear and balanced product descriptions when a
				  consumer is shopping for a mortgage such as when the consumer makes an inquiry
				  to the provider about a mortgage product and receives information about
				  nontraditional products, or when marketing relating to nontraditional mortgage
				  products is given by the provider to the consumer not just upon the submission
				  of an application or at consummation.9 The provision
				  of such information would serve as an important supplement to the disclosures
				  currently required under TILA and Regulation Z or other
				  laws.10
*
Promotional Materials and Product
				  Descriptions
Promotional Materials and other product descriptions
				  should provide information about the costs, terms, features, and risks of
				  nontraditional mortgages that can assist consumers in their product selection
				  decisions, including information about the matters discussed below.
*
Payment Shock.
Providers should apprise
				  consumers of potential increases in payment obligations for these products,
				  including circumstances in which interest rates or negative amortization reach
				  a contractual limit. For example, product descriptions could state the maximum
				  monthly payment a consumer would be required to pay under a hypothetical loan
				  example once amortizing payments are required and the interest rate and
				  negative amortization caps have been reached.11 Such
				  information also could describe when structural payment changes will occur
				  (e.g., when introductory rates expire, or when amortizing payments are
				  required), and what the new payment amount would be or how it would be
				  calculated. As applicable, these descriptions could indicate that a higher
				  payment may be required at other points in time due to factors such as negative
				  amortization or increases in the interest rate index.
*
Negative Amortization.
When negative
				  amortization is possible under the terms of a nontraditional mortgage product,
				  consumers should be apprised of the potential for increasing principal balances
				  and decreasing home equity, as well as other potential adverse consequences of
				  negative amortization. For example, product descriptions should disclose the
				  effect of negative amortization on loan balances and home equity, and could
				  describe the potential consequences to the consumer of making minimum payments
				  that cause the loan to negatively amortize. (One possible consequence is that
				  it could be more difficult to refinance the loan or to obtain cash upon a sale
				  of the home.)
*
Prepayment Penalties.
If the provider may
				  impose a penalty in the event that the consumer prepays the mortgage, consumers
				  should be alerted to this fact and to the need to ask the lender about the
				  amount of any such penalty.
*
Cost of Reduced Documentation Loans.
If a
				  provider offers both reduced and full documentation loan programs and there is
				  a pricing premium attached to the reduced documentation program, consumers
				  should be alerted to this fact.
*
Monthly Statements on Payment Option
				  ARMs
Monthly statements that are provided to consumers on payment
				  option ARMs should provide information that enables consumers to make informed
				  payment choices, including an explanation of each payment option available and
				  the impact of that choice on loan balances. For example, the monthly payment
				  statement should contain an explanation, as applicable, next to the minimum
				  payment amount that making this payment would result in an increase to the
				  consumer's outstanding loan balance. Payment statements also could provide the
				  consumer's current loan balance, what portion of the consumer's previous
				  payment was allocated to principal and to interest, and, if applicable, the
				  amount by which the principal balance increased. Providers should avoid leading
				  payment option ARM borrowers to select a non-amortizing or
				  negatively-amortizing payment (for example, through the format or content of
				  monthly statements).
*
Practices to Avoid
Providers also should avoid practices that obscure
				  significant risks to the consumer. For example, if a provider advertises or
				  promotes a nontraditional mortgage by emphasizing the comparatively lower
				  initial payments permitted for these loans, the provider also should give clear
				  and comparably prominent information alerting the consumer to the risks. Such
				  information should explain, as relevant, that these payment amounts will
				  increase, that a balloon payment may be due, and that the loan balance will not
				  decrease and may even increase due to the deferral of interest and/or principal
				  payments. Similarly, providers should avoid promoting payment patterns that are
				  structurally unlikely to occur. Such practices could raise legal and other
				  risks for providers.
Providers also should avoid such practices as: giving
				  consumers unwarranted assurances or predictions about the future direction of
				  interest rates (and, consequently, the borrower's future obligations); making
				  one-sided representations about the cash savings or expanded buying power to be
				  realized from nontraditional mortgage products in comparison with amortizing
				  mortgages; suggesting that initial minimum payments in a payment option ARM
				  will cover accrued interest (or principal and interest) charges; and making
				  misleading claims that interest rates or payment obligations for these products
				  are "fixed."
Control Systems
-Providers should develop and use
				  strong control systems to monitor whether actual practices are consistent with
				  their policies and procedures relating to nontraditional mortgage products.
				  Providers should design control systems to address compliance and consumer
				  information concerns as well as the risk management considerations discussed in
				  this guidance. Lending personnel should be trained so that they are able to
				  convey information to consumers about the product terms and risks in a timely,
				  accurate, and balanced manner. As products evolve and new products are
				  introduced, lending personnel should receive additional training, as necessary,
				  to continue to be able to convey information to consumers in this manner.
				  Lending personnel should be monitored to determine whether they are following
				  these policies and procedures. Providers should review consumer complaints to
				  identify potential compliance, reputation, and other risks. Attention should be
				  paid to appropriate legal review and to using compensation programs that do not
				  improperly encourage lending personnel to direct consumers to particular
				  products.
With respect to nontraditional mortgage loans that a provider
				  makes, purchases, or services using a third party, such as a mortgage broker,
				  correspondent, or other intermediary, the provider should take appropriate
				  steps to mitigate risks relating to compliance and consumer information
				  concerns discussed in this guidance. These steps would ordinarily include,
				  among other things, (1) conducting due diligence and establishing other
				  criteria for entering into and maintaining relationships with such third
				  parties, (2) establishing criteria for third-party compensation designed to
				  avoid providing incentives for originations inconsistent with this guidance,
				  (3) setting requirements for agreements with such third parties, (4)
				  establishing procedures and systems to monitor compliance with applicable
				  agreements, policies, and laws, and (5) implementing appropriate corrective
				  actions in the event that the third party fails to comply with applicable
				  agreements, policies, or laws.
Appendix
Interest-Only Mortgage Loan
-A nontraditional
				  mortgage on which, for a specified number of years (e.g., three or five years),
				  the borrower is required to pay only the interest due on the loan during which
				  time the rate may fluctuate or may be fixed. After the interest-only period,
				  the rate may be fixed or fluctuate based on the prescribed index and payments
				  include both principal and interest.
Payment Option ARM
-A nontraditional mortgage
				  that allows the borrower to choose from a number of different payment options.
				  For example, each month, the borrower may choose a minimum payment option based
				  on a "start" or introductory interest rate, an interest-only payment option
				  based on the fully indexed interest rate, or a fully amortizing principal and
				  interest payment option based on a 15-year or 30-year loan term, plus any
				  required escrow payments. The minimum payment option can be less than the
				  interest accruing on the loan, resulting in negative amortization. The
				  interest-only option avoids negative amortization but does not provide for
				  principal amortization. After a specified number of years, or if the loan
				  reaches a certain negative amortization cap, the required monthly payment
				  amount is recast to require payments that will fully amortize the outstanding
				  balance over the remaining loan term.
Reduced Documentation
-A loan feature that is
				  commonly referred to as "low doc/no doc," "no income/no asset," "stated income"
				  or "stated assets." For mortgage loans with this feature, a provider sets
				  reduced or minimal documentation standards to substantiate the borrower's
				  income and assets.
Simultaneous Second-Lien Loan
-A lending
				  arrangement where either a closed-end second-lien or a home equity line of
				  credit (FtELOC) is originated simultaneously with the first lien mortgage loan,
				  typically in lieu of a higher down payment.
1Interest-only and payment option
				  ARMs are variations of conventional ARMs, hybrid ARMs, and fixed rate products.
				  Refer to the Appendix for additional information on interest-only and payment
				  option ARM loans. This guidance does not apply to reverse mortgages; home
				  equity lines of credit ("HELOCs"), other than as discussed in the Simultaneous
				  Second-Lien Loans section; or fully amortizing residential mortgage loan
				  products.
2Refer to the Appendix for
				  additional information on reduced documentation and simultaneous second-lien
				  loans.
3 The fully indexed rate equals
				  the index rate prevailing at origination plus the margin that will apply after
				  the expiration of an introductory interest rate. The index rate is a published
				  interest rate to which the interest rate on an ARM is tied. Some commonly used
				  indices include the 1-Year Constant Maturity Treasury Rate (CMT), the 6-Month
				  London Interbank Offered Rate (LIBOR), the 11th
				  District Cost of Funds (COFI), and the Moving Treasury Average (MTA), a
				  12-month moving average of the monthly average yields of U.S. Treasury
				  securities adjusted to a constant maturity of one year. The margin is the
				  number of percentage points a lender adds to the index value to calculate the
				  ARM interest rate at each adjustment period. In different interest rate
				  scenarios, the fully indexed rate for an ARM loan based on a lagging index
				  (e.g., MTA rate) may be significantly different from the rate on a comparable
				  30-year fixed-rate product. In these cases, a credible market rate should be
				  used to qualify the borrower and determine repayment capacity.
4The fully amortizing payment
				  schedule should be based on the term of the loan. For example, the amortizing
				  payment for a loan with a 5-year interest only period and a 30-year term 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.
5The balance that may accrue from
				  the negative amortization provision does not necessarily equate to the full
				  negative amortization cap for a particular loan. The spread between the
				  introductory or "teaser" rate and the accrual rate will determine whether or
				  not a loan balance has the potential to reach the negative amortization cap
				  before the end of the initial payment option period (usually five years). For
				  example, a loan with a 115 percent negative amortization cap but a small spread
				  between the introductory rate and the accrual rate may only reach a 109 percent
				  maximum loan balance before the end of the initial payment option period, even
				  if only minimum payments are made. The borrower could be qualified based on
				  this lower maximum loan balance.
6A loan will not be determined to
				  be "collateral-dependent" solely through the use of reduced documentation.
7These program disclosures apply
				  to ARM products and must be provided at the time an application is provided or
				  before the consumer pays a nonrefundable fee, whichever is earlier.
8Providers also should review the
				  recommendations relating to mortgage lending practices set forth in other
				  supervisory guidance from their respective primary regulators, as applicable,
				  including guidance on abusive lending practices.
9Providers also should strive to:
				  (1) focus on information important to consumer decision making; (2) highlight
				  key information so that it will be noticed; (3) employ a user-friendly and
				  readily navigable format for presenting the information; and (4) use plain
				  language, with concrete and realistic examples. Comparative tables and
				  information describing key features of available loan products, including
				  reduced documentation
programs, also may be useful for consumers considering the
				  nontraditional mortgage products and other loan features described in this
				  guidance. 10Providers may not be able to incorporate
				  all of the practices recommended in this guidance when advertising
				  nontraditional mortgages through certain forms of media, such as radio,
				  television, or billboards. Nevertheless, providers should provide clear and
				  balanced information about the risks of these products in all forms of
				  advertising.
11Consumers also should be
				  apprised of other material changes in payment obligations, such as balloon
				  payments.
12 For example, marketing
				  materials for payment option ARMs may promote low predictable payments until
				  the recast date. Such marketing should be avoided in circumstances in which the
				  minimum payments are so low that negative amortization caps would be reached
				  and higher payment obligations would be triggered before the scheduled recast,
				  even if interest rates remain constant.
Miss. Code Ann. §
										81-18-29;
				  Effective date August 30, 2013