Comptroller Issues Option ARMs Caveat

The new comptroller of the currency believes payment-option ARMs with negative amortization features should only be made to borrowers who can clearly handle the payment shock.Comptroller John Dugan noted in a speech to the Consumer Federation of American that the federal banking regulators will be issuing guidance on nontraditional adjustable-rate mortgages before the end of December. "I firmly believe that the guidance should draw clear lines about the appropriate standards for qualifying borrowers for payment-option ARMs that explicitly take into account potential payment shock," Mr. Dugan said. Citing an example of a typical option ARM, the comptroller said the monthly payment can increase by 50% or more after the fifth year, when it converts to a fully amortizing loan. "Lenders should not encourage or accept applications from borrowers who clearly cannot afford the dramatically increased payments that are likely to result at the end of the five-year, low-minimum-payment period," the comptroller said. Mr. Dugan reminded the CFA members that the banking regulators clamped down on negative amortization in the credit card industry several years ago.