Will feds make banks tighten up on interest-only and payment-option loans?

Several federal regulatory bodies that oversee banks and credit unions have proposed to make it harder for banks to make interest only and payment option loans (sometimes called “negative amortization” loans). (More details available on our main site.)

These loans do not require any payments on principal in the early years, and in some cases, principal is actually increased as unpaid interest is added. The advantage is that monthly payments are lower, allowing people to qualify for more expensive houses.

The disadvantage of these loans is that invariably the payments will go up at some point and if interest rates go up, they could more than double. This could make the payments too large and cause people to lose their houses.

The banks say that the proposed regulations would make it hard for them to make these loans and consumers might lose the option. One proposed reg would require the banks to determine whether or not a borrower was “suitable” for such a loan.

The banks also complain that state regulated banks would not have to conform to these requirements. Of course federally chartered banks never complain when they do not have to conform to stricter state requirements. A good example of hypocrisy.

I have felt for a long time that lenders have gotten far too loose in their lending. They should be happy that the feds want to make them be just a little bit more careful and conservative. In the long run, it will save them a lot of foreclosures!

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