Tougher subprime-lending standards urged (Market Watch)

Federal bank regulators demanded tougher standards for subprime loans Friday, saying they’re worried that borrowers who select adjustable-rate mortgages may not understand the risks associated with them.

Guidance from the Federal Reserve and other agencies targets categories including subprime ARMs that have low initial payments and loans that have high or no limits on how much payments or interest rates may increase.
The agencies said lenders should inform consumers of potential payment increases and prepayment penalties associated with such loans. Lenders should approve loans only when they know borrowers can repay them, they added. Read the guidance.

Subprime mortgages are offered to home buyers who fail to meet the strictest lending standards. Companies that specialize in these types of loans have suffered recently, as the dizzying rise in housing prices has slowed and interest rates have edged off record lows.
The Mortgage Bankers Association criticized the regulators’ proposals, saying they could cut off credit to low-income buyers and minorities. The chairman of the Senate Banking Committee, meanwhile, called the move “responsible.”

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