Final Guidance Issued on Nontraditional Mortgage Product Risks - Circulars

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Circular

Final Guidance Issued on Nontraditional Mortgage Product Risks

October 2, 2006

Circular No. 11812

To All Depository Institutions and Others Concerned
in the Second Federal Reserve District:

The federal financial regulatory agencies have issued final guidance to address the risks posed by residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest (Interagency Guidance on Nontraditional Mortgage Product Risks ).

These products, referred to variously as "nontraditional," "alternative," or "exotic" mortgage loans (referred to below as nontraditional mortgage loans), include "interest-only" mortgages and "payment option" adjustable-rate mortgages. These products allow borrowers to exchange lower payments during an initial period for higher payments later. The final guidance discusses the importance of carefully managing the potential heightened risk levels created by these loans.

The agencies are issuing for comment Proposed Illustrations of Consumer Information for Nontraditional Mortgage Products. Public comment is sought on all aspects of the proposed illustrations, including whether these illustrations or a modified form should be adopted by the agencies. Comments are due 60 days after publication in the Federal Register.

The agencies are also issuing an addendum to the May 2005 Interagency Credit Risk Management Guidance for Home Equity Lending that provides additional guidance for managing risks associated with open-end home equity lines of credit (HELOCs) that contain interest-only features. These consumer protection recommendations are similar to the guidance contained in the Interagency Guidance on Nontraditional Mortgage Product Risks referenced above.

Press release OFFSITE
Addendum OFFSITE
Interagency Guidance on Nontraditional Mortgage Products OFFSITE PDF
Proposed Illustrations of Consumer Information for Nontraditional Mortgage Products OFFSITE PDF

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