Option Payment Shock Worries Feds

Federal regulators are worried that banks are not warning customers that monthly payments on option-payment ARMs could rise significantly in three and five years, and that the banks' reputation could be tarred if the loans go bad.Regulators are concerned about what the lenders and brokers are telling consumers about the payment adjustments, Deputy Comptroller Barbara Grunkemeyer told a Risk Management Association conference. She noted that a lot of banks are selling option adjustable-rate mortgages into the secondary market and shedding the credit risk. "But it doesn't get rid of the reputational risk," Ms. Grunkemeyer said. Borrowers are going to remember that they got the loan from the "ABC" Bank. "They are going to remember that you did not explain to them that the payments were going to go up 50% after five years," she said. "And now they can't pay it." The deputy comptroller for credit risk said the regulators will be issuing guidance this year in interest-only and option ARMs that focuses on underwriting and how banks qualify borrowers for these loan products.