Regulators to Florida Mortgage Lenders: Evalutate Borrowers Better

U.S. regulators urged national and Florida mortgage lenders in draft guidance last week to better evaluate whether less credit-worthy borrowers will be able to repay their loans and make clear the risks they face as mortgage rates are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 amortizing repayment schedule,” the document states.

The risk in subprime Florida home loans

Regulators are concerned lenders are issuing Florida 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.

Subprime borrowers also face the risk of “losing their home,” the document states. This would occur as late payments build up and foreclosure became more common.

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 soon. The regulators will open a 60-day comment period during which it is seeking comments from the lending industry, according to the document