loan, the prevalence of " stated - income " lending was a clear culprit. substantial anecdotal evidence indicates that failing to verify income invited fraud. moreover, when we looked at the loan - level data we saw a clear correlation between " low - doc " or " no - doc " lending and performance problems, particularly early payment defaults. that is why we have proposed to complement a broad requirement to assess repayment ability with a specific requirement to verify the income or assets a lender relies on to make a credit decision. we recognize that stated - income lending may have a proper place when not layered on top of too many other risks. indeed, stated income lending and " no / low - doc " lending are defining features of the alt - a market, which has long served borrowers with good credit scores who seek some underwriting flexibility. we would target the verification requirement to higher - priced loans, including the higher - priced end of the alt - a market, where the risks of stated - income lending could be layered on top of too many other risks. this targeting is intended to maintain consumer access to responsible credit. the proposal identifies standard documents that would be acceptable, such as w - 2 forms. it also allows, however, any third party documents that provide reasonably reliable evidence of income. this rule is meant to preserve consumer choice by allowing the market to identify credible nontraditional documentation of consumer income - - for example, check - cashing receipts. in that regard, the proposal responds to input we gathered through the hoepa hearing i chaired last june. several panelists spoke of the fact that some consumers may have access to only nonstandard documents and others, such as self - employed entrepreneurs, may have some difficulty documenting their income. to help ensure that the proposal preserves access to credit for the full range of consumers, we have sought public comment on this issue. escrows for taxes and insurance another part of our proposal for higher - priced loans - - a requirement to escrow taxes and insurance - - would also help ensure that borrowers can afford their payments. escrowing has become standard practice in the prime market, and the case for making it standard in the subprime market, too, appears compelling. consumers with shorter or weaker credit histories may be less likely to appreciate the sizable burden that taxes and insurance can add to the cost of homeownership, or more vulnerable to being misled by payment quotes that leave out these amounts

at the same time, the proposal does offer specifics. for example, it would create a presumption that a lender had violated the regulations if it engaged in a pattern or practice of failing to underwrite at the fully - indexed rate. 5 this presumption is derived from the subprime guidance the agencies issued last year. it bears emphasis, however, that our proposed regulations would be more robust and comprehensive than the guidance. the regulations would apply to all mortgage lenders, including independent mortgage companies. guidance, in contrast, does not ensure uniformity of coverage. moreover, the regulations would be legally enforceable by supervisory and enforcement agencies. just as important, the regulations, unlike the guidance, would be legally enforceable by consumers. borrowers who brought timely actions could recover statutory damages for violations, above and beyond any actual damages they suffered. the proposed requirement to assess repayment ability is intended to protect consumers from abusive practices while maintaining their access to responsible credit. we recognize that satisfying both objectives at the same time is a challenge. the proposed rule's potential for on an adjustable - rate mortgage, the fully - indexed rate is the sum of the value of the applicable index as of loan origination and the margin specified in the loan agreement. for example, a typical 2 / 28 mortgage issued in 2006 might have a fully - indexed rate of 11. 37. this assumes that the mortgage was linked to the six - month libor, that libor was at its 2006 average value of 5. 37 percent, and that the mortgage had a margin of six percentage points. consumer actions, coupled with its careful avoidance of prescribing quantitative underwriting thresholds, could raise compliance and litigation risk. in turn, this could raise the cost of credit for higher - risk borrowers or limit the availability of responsible credit. that is why we have proposed prohibiting a " pattern or practice " of disregarding repayment ability rather than attaching a risk of legal liability to every individual loan that does not perform. this approach is meant to preserve choices for borrowers with shorter or weaker credit records while protecting them from lenders who have a practice of disregarding repayment ability or are found to exhibit a pattern of unaffordable loans. we anticipate vigorous comment on our proposed approach and have specifically solicited suggestions for its implementation. income verification when we looked closely at why so many borrowers had mortgages that they struggled to repay so soon after taking out the