Based on Investopedia, subprime mortgages fund property for those who have bad or limited credit histories. Lenders charge higher interest rates to compensate for the risk that these borrowers are more likely to default on their loans. California doesn’t have specific subprime mortgage regulations set up. Rather, regulations are present in interagency guidance issued by the agencies which regulate banks, such as the Federal Deposit Insurance Corporation, the Federal Reserve Bank, the Office of the Comptroller of the Currency, the National Credit Union Administration and the Office of Thrift Supervision.
1999 Interagency Guidance on Subprime Lending
As stated by the Federal Deposit Insurance Corporation, this guidance was provided for traditional banking institutions which, for the very first time, were participating in subprime mortgage lending on a big scale. Many traditional non-bank subprime lenders were leaving the market or were purchased by banks. This guidance emphasizes strong selection procedures, including the use of seasoned collectors, quick decisions to foreclose and limiting the use of loan extensions to minimize losses. From a consumer-protection standpoint, the guidance advises the use of a compliance plan to monitor the mortgage origination process, ensuring otherwise creditworthy borrowers are not given subprime mortgages to boost an originator’s bonus.
2001 Expanded Guidance for Subprime Lending Programs
This guidance focused on lending institutions with over 25 percent of their regulatory funds stored in subprime loans. The Office of Thrift Supervision notes the guidance tightens the use of mortgage delinquency healing methods such as extensions, deferrals and renewals, requiring that lenders obtain evidence of a borrower’s willingness and ability to repay in the form of an upgraded credit agency report, employment verifications and debt-to-income ratio calculation. From a consumer protection standpoint, lenders are counseled to prevent making mortgages which require the pledging of security aside from the property funded.
2007 Statement on Subprime Mortgage Lending
The agencies issued this guidance to deal with risks linked to adjustable-rate mortgage products sold to subprime borrowers, which contributed heavily into the subprime mortgage collapse. In particular, the Federal Reserve Board notes that the agencies are concerned that these borrowers will not be able to manage increased payments once the mortgage’s initial introductory rate expires. The statement requires lenders to make sure that borrowers can afford repayments given potential rate changes over the life of their mortgage. Additionally, it requires that lenders obtain documented evidence of borrowers’ income, liabilities and assets. Lenders are encouraged to work together with borrowers nearing default to find repayment solutions which are advantageous to the borrower and lender. Lenders are also warned to provide advice to borrowers at a”balanced and clear” way that provides accessibility to all mortgage products that the debtor qualifies for, not just to subprime products.