The Consumer Financial Protection Bureau (CFPB) on Wednesday released details on how its examiners will asses the inherent risk of subprime loans products offered by both private banks and mortgage lenders.
Richard Cordray, the newly-appointed director of the CFPB, said in a statement that illumination is a central focus of the new examinations.
“The mortgage market cannot work well for consumers if the spotlight shines only on one part of it, while the rest is left in darkness,” Cordray said. “Our supervision program will illuminate the entire marketplace by making non-banks play by the same rules as the banks.”
The main feature of the examinations, as HousingWire showed in a summary of the regulations, is the assessment of risk and evaluation of the financial institution’s policies and procedures. A loan is considered risky if it has features such as:
- little to no requirement of any documentation of income and/or employment
- simultaneous second lien
- negative amortization, aka interest-only payments (also called Option ARMs)
- balloon clauses
If any of those characteristics are present in a loan, the CFPB will determine if those increased risks are reflected in the loan’s underwriting policies, and if any other additional factors are required for approval.
The CFPB will also analyze compensation practices – if underwriters are motivated to perform hasty completions to secure their payments – and if lenders utilize loopholes and exceptions to avoid typical underwriting standards and underwrite a greater volume of loans.