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Joint Press Release

For immediate release

Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision
National Credit Union Administration

September 29, 2006

Federal Financial Regulatory Agencies Issue Final Guidance on Nontraditional
Mortgage Product Risks
The federal financial regulatory agencies today issued final guidance to address the risks
posed by residential mortgage products that allow borrowers to defer repayment of principal
and sometimes interest (Interagency Guidance on Nontraditional Mortgage Product Risks).
These products, referred to variously as "nontraditional," "alternative," or "exotic" mortgage
loans (referred to below 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 later.
While similar products have been available for many years, the number of institutions
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 a similar-size mortgage under
traditional terms and underwriting standards. The agencies are concerned that some
borrowers may not fully understand the risks of these products. While many of these
features exist in other adjustable-rate mortgage products, the agencies' concern is elevated
with nontraditional products because of the lack of principal amortization and the potential
for negative amortization. In addition, institutions are increasingly combining these loans
with other features that may compound risk ("risk layering"). These features include making
simultaneous second-lien mortgages and relying on reduced or no documentation in
evaluating an applicant's creditworthiness.
The final guidance discusses the importance of carefully managing the potential heightened
risk levels created by these loans. Toward that end, management should:
Ensure that loan terms and underwriting standards are consistent with prudent
lending practices, including consideration of a borrower's repayment capacity;
Recognize that many nontraditional mortgage loans, particularly when they
have risk-layering features, are untested in a stressed environment. These
products warrant strong risk management standards, capital levels
commensurate with the risk, and an allowance for loan and lease losses that
reflects the collectibility of the portfolio; and

Ensure that consumers have sufficient information to clearly understand loan
terms and associated risks prior to making a product or payment choice.
The agencies published for comment proposed interagency guidance on Nontraditional
Mortgage Products on December 29, 2005. Comments were received from financial
institutions, trade associations, consumer and community organizations, state and financial
regulatory organizations, and other members of the public. The agencies made a number of
changes to the proposal to respond to the commenters' concerns and to provide additional
The guidance is attached.
The agencies are issuing two additional related documents--Proposed Illustrations of
Consumer Information for Nontraditional Mortgage Products and an addendum to the May
2005 Interagency Credit Risk Management Guidance for Home Equity Lending.
Several commenters on the proposed guidance encouraged the agencies to include model or
sample disclosures or other descriptive materials as part of the interagency guidance. In
response, the agencies are issuing for comment Proposed Illustrations of Consumer
Information for Nontraditional Mortgage Products. The agencies believe that illustrations
of consumer information may be useful to institutions as they seek to implement the
consumer information recommendations of the guidance. The agencies seek public
comment on all aspects of the proposed illustrations, including whether these illustrations or
a modified form should be adopted by the agencies.
Comments on the proposed illustrations are due 60 days after publication in the Federal
The agencies are also issuing an addendum to the May 2005 Interagency Credit Risk
Management Guidance for Home Equity Lending that provides additional guidance for
managing risks associated with open-end home equity lines of credit (HELOCs) that contain
interest-only features. While HELOCs with these features may provide flexibility for
consumers, the agencies are concerned that consumers may not fully understand the product
terms and associated risks. This addendum provides guidance addressing the timing and
content of communications with consumers obtaining interest- only HELOCs. These
consumer protection recommendations are similar to the guidance contained in the
Interagency Guidance on Nontraditional Mortgage Product Risks referenced above.
NTM attachment 1 (104 KB PDF)
NTM attachment 2 (261 KB PDF)
Media Contacts:
Federal Reserve Susan Stawick
David Barr
John Mckechnie

(202) 452-2955
(202) 898-6992
(703) 518-6331


(202) 874-5770

Kevin Mukri
Katie Fitzgerald

2006 Banking and consumer regulatory policy

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Last update: September 29, 2006