Proposed federal underwriting guidance could create "questionable distinctions" between prime and subprime borrowers that would cut off credit to some subprime borrowers in the name of consumer protection, according to mortgage banking attorneys at K&L Gates."The natural consequence is that prime borrowers are encouraged, or at least permitted, by national housing policy to seek to finance the purchase of a home, but subprime borrowers are subjected to more rigid restrictions," the K&LG attorneys point out in an alert to clients. The proposed guidance would require lenders to underwrite adjustable-rate mortgages for subprime borrowers at the fully indexed rate, while prime borrowers would continue to qualify at the lower teaser rate. "The imposition of differing standards for subprime vs. non-subprime borrowers raises many concerns, not the least of which is that such a practice may result in a disparate impact on borrowers based upon categorizations protected under the fair lending laws," the alert says.

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