US regulators urged mortgage lenders in draft guidance on Friday to better evaluate whether less credit-worthy borrowers will be able to repay their loans and make clear the risks they face as mortgage rates are reset.
The proposed guidance, obtained by Reuters, asks lenders to weigh a "borrower's ability to repay the debt by its final maturity at the fully indexed rate, assuming a fully amortising repayment schedule," the document states.
Regulators are concerned lenders are issuing mortgages to borrowers with little proof that they can repay their loan and do not fully understand the risk of increasing payments, the document states.
Subprime borrowers could find themselves unable to afford monthly payments after the initial "teaser" rate expires and make payments for taxes and other expenses if lenders do not hold such costs in escrow, the document states. Subprime borrowers also face the risk of "losing their home," the document states.
The document also outlines a series of consumer protection principles that lenders should bear in mind such as providing ample information about the long-term costs of the loan and the risk of future "payment shock". The new guidance is expected to be officially released Friday. The regulators will open a 60-day comment period during which it is seeking comments from the lending industry, according to the document.