States Adopt Nontraditional, Bad Credit Mortgage Guidelines

Regulators in at least seven states are moving to adopt guidelines for nontraditional, bad credit mortgages modeled after those issued by federal bank regulators in September.

Georgia, Idaho, Iowa, Massachusetts, Montana, New Hampshire and Wyoming have announced they will adopt or plan to adopt identical guidelines instructing home loan lenders to provide more complete disclosure of loan terms to consumers, while tightening underwriting standards.

The federal guidelines, intended to address concerns about the risks interest-only mortgages and pay option, negative amortization loans may pose to both borrowers and lenders, apply only to federally chartered banks - NOT state-regulated banks and mortgage lenders.

When the guidelines were issued, federal officials urged states to issue similar guidelines to ensure all lenders were competing on an even playing field. Inman News had the report.

The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators developed the guidelines now being issued by several states.

The groups, which represent state bank and residential mortgage regulators across the U.S., urged states to adopt them without modifications so that lenders won’t face a patchwork of regulations that vary from state to state.

The CSBS guidelines mirror federal guidance instructing banks to fully disclose to consumers the potential for payments to increase on interest-only and payment option, negative amortization loans, and to analyze a borrower’s ability to repay those loans at the fully indexed rate.

Massachusetts Commissioner of Banks Steven L. Antonakes recognized that goal this week in a letter to the state’s licensed mortgage lenders, informing them the state will adopt the guidelines developed by CSBS.

“Recognizing that the (federal guidelines do) not cover a majority of loan originations in the Commonwealth, the Division, in cooperation with the Conference of State Bank Supervisors, has developed parallel guidance for licensed mortgage brokers and mortgage lenders in this state,” Antonakes wrote.

“The Division strongly supports the purpose of the guidance adopted by the Agencies and is committed to promote the uniform application of consumer protections for all borrowers.”