5 Del. Admin. Code § 2108/2209-2.0

Current through Reigster Vol. 28, No. 6, December 1, 2024

Section 2108/2209-2.0 - Subprime Mortgage Lending

2.1 The Commissioner is adoptingthis Statement on Subprime Mortgage Lending (Statement) to address emerging issues and questions relating to subprime mortgage lending practices. The term "subprime" refers to the credit characteristics of individual borrowers. Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income (DTI) ratios, or other criteria that may encompass borrowers with incomplete credit histories. "Subprime loans" are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers. Generally subprime borrowers will display a range of credit risk characteristics that may include one or more of the following:

2.1.1 Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months;

2.1.2 Judgment, foreclosure, repossession, or charge-off in the prior 24 months;

2.1.3 Bankruptcy in the last 5 years;

2.1.4 Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of 660 or below (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood; and/or

2.1.5 Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living expenses after deducting total monthly debt-service requirements from monthly income.

2.2 This list is illustrative rather than exhaustive and is not meant to define specific parameters for all subprime borrowers. Additionally, this definition may not match all market or institution specific subprime definitions, but should be viewed as a starting point from which the Commissionerwill expand examination efforts.²

2.3 The Commissioner isconcerned that borrowers may not fully understand the risks and consequences of obtaining products that can cause payment shock.³ In particular, the Commissioner isconcerned with certain adjustable-rate mortgage (ARM) products typically⁴ offered to subprime borrowers that have one or more of the following characteristics:

2.3.1 Low initial payments based on a fixed introductory rate that expires after a short period and then adjusts to a variable index rate plus a margin for the remaining term of the loan;⁵

2.3.2 Very high or no limits on how much the payment amount or the interest rate may increase ("payment or rate caps") on reset dates;

2.3.3 Limited or no documentation of borrowers' income;

2.3.4 Product features likely to result in frequent refinancing to maintain an affordable monthly payment; and/or

2.3.5 Substantial prepayment penalties and/or prepayment penalties that extend beyond the initial fixed interest rate period.

2.4 Products with one or more of these features present substantial risks to both consumers and providers. These risks are increased if borrowers are not adequately informed of the product features and risks, including their responsibility for paying real estate taxes and insurance, which may be separate from their monthly mortgage payments. The consequences to borrowers could include: being unable to afford the monthly payments after the initial rate adjustment because of payment shock; experiencing difficulty in paying real estate taxes and insurance that were not escrowed; incurring expensive refinancing fees, frequently due to closing costs and prepayment penalties, especially if the prepayment penalty period extends beyond the rate adjustment date; and losing their homes. Consequences to providers may include unwarranted levels of credit, legal, compliance, reputation, and liquidity risks due to the elevated risks inherent in these products.

2.5 The Commissionernotes that many of these concerns are addressed in existing interagency guidance.⁶ The Commissioner recognizes that these guidance documents may not apply to state-supervised providers. However, the Commissionerbelieves these guidelines provide sound principles for mortgage lending as a reference for state-supervised providers.

2.6 While Regulation 2107/2208 Guidance on Nontraditional Mortgage Product Risks may not explicitly pertain to products with the characteristics addressed in this Statement, it outlines prudent underwriting and consumer protection principles that providers also should consider with regard to subprime mortgage lending. This Statement reiterates many of the principles addressed in existing guidance relating to prudent risk management practices and consumer protection laws.⁷

^{2 "Subprime" and "subprime loans" are defined by the 2001 Interagency Expanded Guidance for Subprime Lending Programs. To promote consistency and uniformity, the Commissionersupports these definitions for the purposes of this Statement.}

^{3 Payment shock refers to a significant increase in the amount of the monthly payment that generally occurs as the interest rate adjusts to a fully indexed basis. Products with a wide spread between the initial interest rate and the fully indexed rate that do not have payment caps or periodic interest rate caps, or that contain very high caps, can produce significant payment shock.}

^{4 As noted by Agencies in the final statement, the Subprime Statement focuses on subprime borrowers; however, the statement applies to ARM products that have one or more characteristics that can cause payment shock. Providers should look to the principles of this statement when such ARM products are offered to non-subprime borrowers.}

^{5 For example, ARMs known as "2/28" loans feature a fixed rate for two years and then adjust to a variable rate for the remaining 28 years. The spread between the initial fixed interest rate and the fully indexed interest rate in effect at loan origination typically ranges from 300 to 600 basis points.}

^{6 The most prominent are the 1993 Interagency Guidelines for Real Estate Lending (Real Estate Guidelines), the 1999 Interagency Guidance on Subprime Lending, and the 2001 Expanded Guidance for Subprime Lending Programs (Expanded Subprime Guidance).}

^{7 As with the Interagency Guidance on Nontraditional Mortgage Product Risks, 71 FR 58609 (October 4, 2006), the interagency Subprime Statement applies to all banks and their subsidiaries, bank holding companies and their nonbank subsidiaries, savings associations and their subsidiaries, savings and loan holding companies and their subsidiaries, and credit unions. This Statement is applicable to all state-supervised mortgage providers.}

5 Del. Admin. Code § 2108/2209-2.0