U.S. Comptroller of the Currency: All Mortgage Originators Must Use Caution with Exotic Home Loans

Across the nation, many insiders believe that less stringent mortgage lending standards are to blame for the recent rise in delinquenies.

With that in mind, the U.S. Comptroller of the Currency, John Dugan, recently stressed the following point: All banks and mortgage originators, not just federally regulated ones, should use caution when offering exotic loans like payment-deferral, or option adjustable-rate mortgage, products to prospective home buyers.
The plea comes less than a month after federal regulators warned banks to make sure borrowers can pay back the full amount of what they borrow, along with ensuring that homeowners are aware of all the terms of their mortgage loan.

But that government guidance doesn’t apply to some state-regulated lenders. Tuesday, Dugan said it should.

“It ought to be fundamental that all mortgage originators employ prudent lending practices,” Dugan said in a prepared speech to America’s Community Bankers. It was reported by MarketWatch.

He urged state regulators to adopt standards that mirror federal standards aimed at protecting borrowers from the risks associated with so-called exotic home loans. Many state-regulated companies will have no contact at all with federally regulated institutions, Dugan said.

While regulators aren’t demanding banks and other lenders halt offering interest-only and other types of loans, they are trying to ensure customers have enough information about the mortgages. Some loans offer low monthly payments but can come with a bigger payment obligation later down the road.

“I believe that it is essential for state regulators to embrace these efforts so that the standards adopted at the state level address the core risks covered by the federal guidance,” Dugan said.