To All Bank Holding Companies, Nonbank Subsidiaries of Bank Holding Companies, State Member Banks and Others Concerned in the Second Federal Reserve District:
The Federal Reserve and the other federal financial institutions regulatory agencies have issued an Interagency Guidance on Nontraditional Mortgage Product Risks.
This guidance addresses both risk management and consumer disclosure practices that institutions should employ to effectively assess and manage the risks associated with residential mortgage loans that allow borrowers to defer repayment of principal and sometimes interest (referred to as nontraditional mortgage loans).
Given the potential risks associated with nontraditional mortgage products, the guidance addresses both risk management and consumer disclosure practices that institutions should consider in their mortgage lending activity.
The guidance highlights the key risk areas that should be addressed by an institution in its underwriting standards, loan terms, borrower qualification standards, documentation requirements, and portfolio and risk management practices.
In light of the risks that these products pose to consumers, the guidance also contains recommended practices for an institution to consider when providing information to consumers on the product’s terms and risks.
See the SR letter and interagency guidance for full details.