OCC: IO, Option-ARM Regulation May Be Tough

Proposed regulatory guidance on interest-only and payment-option ARMs may be tougher than a lot of people realize, according to the deputy comptroller of the currency.Deputy Comptroller Barry Wides told a consumer group that federal banking regulators expect lenders to make "conservative assumptions" in their underwriting of these nontraditional adjustable-rate mortgage products. First, lenders should qualify borrowers at the current fully indexed interest rate, not the teaser or introductory rate. Second, the lender should calculate the monthly payment as if the loan were fully amortizing on day one. When it comes to an option ARM, lenders should assume that the borrower will make the minimum payment, calculate the potential negative amortization, and add it to the loan amount. So a $400,000 option ARM with potential negative amortization of $44,000 should be underwritten as if it were a $444,000 mortgage, he said. "We are telling lenders to make conservative assumptions about the borrower making minimum payment and how much they can end up owing, and then amortize that at the current rate," Mr. Wides told the National Community Reinvestment Coalition. The public comment period on the proposed guidance ends March 29.