Banks Should Help Customers Look before They Leap into a Subprime Mortgage

Sub-prime mortgages are causing headaches for some homeowners across the nation, and federal regulatory agencies want to make sure borrowers fully understand the major risks before they sign on the dotted line.

Regulators already had guidance in place that urges banks to help customers know the risks and the repercussions of sub-prime mortgages. Recently, the agencies, including the Federal Reserve, proposed further guidance on sub-prime adjustable rate mortgage (ARM) products and borrowers' ability to service their loans without refinancing or selling their property.

"Regulators have always expected banks to properly underwrite their loans and ensure that their customers are fully aware of what they're getting into-and most banks do," says Tim Bosch, Banking Supervision & Regulation vice president at the St. Louis Fed. "Many of the stories we hear about people losing their homes because they can't service their ARM usually, but not always, concern uninsured and unregulated financial institutions."

Regulators urge banks to make prudent arrangements with borrowers who can no longer meet the obligations of a sub-prime mortgage. "Banks really don't want homes and don't want to foreclose," says Bosch. "So, working out an arrangement is much more beneficial to both parties."

For more information on the proposed guidance, visit www.federalreserve.gov/newsevents/press/bcreg/20070417a.htm.

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