DocMagic, Inc.'s Compliance Department has caused the Illustrations of Consumer Information for Hybrid Adjustable Rate Mortgage Products (ICIHARM.MSC) ("Illustrations") to be laid out for customers' use upon their request. The federal financial regulatory agencies -- Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA) (collectively, the Agencies) --issued the final drafts of the Illustrations on May 22, 2008.
The Illustrations are intended to assist institutions in providing information to consumers about the relative benefits and risks of hybrid ARM products pursuant to the Interagency Statement on Subprime Mortgage Lending ("Subprime Statement"). The Subprime Statement covers certain adjustable-rate mortgage (ARM) products typically offered to subprime borrowers that have one or more of the following characteristics:
Low initial payments based on a fixed introductory rate that expires after a short period and then adjusts to a variable index rate plus a margin for the remaining term of the loan;
Very high or no limits on how much the payment amount or the interest rate may increase ("payment or rate caps") on reset dates;
Limited or no documentation of borrowers' income;
Product features likely to result in frequent refinancing to maintain an affordable monthly payment; and/or
Substantial prepayment penalties and/or prepayment penalties that extend beyond the initial fixed interest rate period.
As stated in the Expanded Guidance for Subprime Lending Programs:
The term "subprime" refers to the credit characteristics of individual borrowers. Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers. Generally, subprime borrowers will display a range of credit risk characteristics that may include one or more of the following:
- Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months;
- Judgment, foreclosure, repossession, or charge-off in the prior 24 months;
- Bankruptcy in the last 5 years;
- Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of 660 or below (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood; and/or
- Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living expenses after deducting total monthly debt-service requirements from monthly income.
The above list is illustrative rather than exhaustive and is not meant to define specific parameters for all subprime borrowers. Additionally, this definition may not match all market or institution specific subprime definitions, but should be viewed as a starting point from which the Agencies will expand examination efforts.
The Illustrations consist of (1) an explanation of some key features of products covered by the Subprime Statement; and (2) three charts with examples of the potential payment shock accompanying these types of loans.
Institutions are not required to use the Illustrations. As stated in the Final Guidance for the Illustrations:
Use of the illustrations is entirely voluntary. Accordingly, there is no Agency requirement or expectation that institutions must use the illustrations in their communications with consumers. Institutions seeking to follow the recommendations set forth in the Subprime Statement may, at their option, elect to:
Use the illustrations;
Provide information based on the illustrations, but expand, abbreviate, or otherwise tailor any information in the illustrations as appropriate to reflect, for example:
the consumer's particular loan requirements or qualifications;
current market conditions, such as by changing the loan amounts, interest rates, and corresponding payment amounts to reflect current local market circumstances;
other material information relating to the loan consistent with the Subprime Statement; and
the results of consumer testing of the illustrations or comparable disclosures; or
Provide the information described in the Subprime Statement, as appropriate, in an alternate format.
If you wish to have the Illustrations added to any of your ARM packages, please contact Customer Service, at (800) 649-1362.
RSS