Magazine article American Banker

OTS: Tie Subprime Loan Rates to Borrower's Track Record

Magazine article American Banker

OTS: Tie Subprime Loan Rates to Borrower's Track Record

Article excerpt

WASHINGTON -

Office of Thrift Supervision Director Ellen Seidman said Tuesday that lenders should offer a subprime mortgage where the rate falls if the borrower's creditworthiness improves.

By issuing a so-called "track record adjusted mortgage," a bank would agree to lower the interest rate if the borrower remained current on the loan for a specified amount of time, Ms. Seidman told the Fannie Mae National Advisory Council.

This type of mortgage would benefit lenders, she said. "There is a powerful incentive during the qualifying condition period not to default," she said. "Longer-term default risk is also likely to be reduced in view of the (potential) decrease in principal and interest payments."

Borrowers also are less likely to refinance high-interest subprime loans if the lender voluntarily lowers the rate, she said. This would particularly benefit banks that retain the mortgage servicing rights, she said.

Regulators are increasingly concerned about all types of subprime lending. The four banking and thrift agencies issued joint guidelines March 1 telling banks that examiners will review these lenders' capital adequacy and risk-management techniques. Comptroller of the Currency John D. Hawke Jr. is expected to release more detailed guidelines for national banks within two weeks.

Subprime refers to loans made to people who are considered a higher than average risk because they have either lower incomes or a blemished credit history. …

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