CSBS to Issue New Guidance Next Week on State Level Sub-Prime Mortgage Lending

The following from Reuters indicates how quickly the regulators are moving to close the gap between existing regulations and the “new” lending infrastructure. Some may argue that it is too late, but better late than never.

U.S. state officials plan to issue guidance next week to tighten subprime mortgage lending by brokers and originators not regulated by the federal government, the Conference of State Bank Supervisors said on Friday.

Officials at CSBS, a group representing state regulators, said so far about 27 states and the District of Colombia plan to adopt the guidance within 48 hours after it is issued on Tuesday. No state has indicated that it will not eventually adopt it, they said.

Last month federal banking regulatory agencies issued guidance to curtail risky practices blamed for a record level of home foreclosures, according to the state group.

The states issued the same standards as federal regulators when adopting nontraditional mortgage guidance last November. They are expected to do the same with the subprime guidance.

Many lenders relaxed underwriting standards for subprime borrowers with weak or no credit during a five-year housing boom that ended in the summer of 2005. Some of the most popular loans involved payments that were low in the beginning but spiked later on.

As the housing market turned, many subprime borrowers fell behind in their mortgage payments and a record number of borrowers faced losing their homes in the first three months of 2007. Many of the biggest subprime lenders have sought bankruptcy protection.

Many mortgages with flexible rates are expected to be adjusted this year and next.
New federal guidelines say borrowers should not be penalized for refinancing a mortgage before a low introductory rate is adjusted upward. It also said lenders must have evidence that a borrower can repay a loan.

The U.S. guidance was issued by the Federal Reserve, Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corp. and the National Credit Union Administration.

Guidance for state-licensed institutions will be issued jointly by CSBS, the American Association of Residential Mortgage Regulators and the National Association of Consumer Credit Administrators.State regulators also plan to issue examination guidance for state supervisors to evaluate compliance by state-licensed mortgage lenders, including compliance on lending to subprime borrowers.