NEWS: U.S. Warns Lenders To Elevate Standards

By Kirstin Downey
Washington Post Staff Writer
Tuesday, May 17, 2005; A01

Federal banking regulators yesterday warned banks and other lenders to be more selective about who can get home equity loans and lines of credit because rising interest rates may make it harder for people to repay their loans.

Government officials said that while mortgage defaults remain rare, many institutions are loading up on high-risk loans.

They urged lenders to review interest-only loans, which allow borrowers to delay principal payments for years, and "no-doc" loans, which don't require documenting borrowers' assets and income. They also suggested that lenders that refuse to do so may find themselves facing heightened federal oversight.

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The regulators' warning came in what is called a "guidance" to the lending institutions, issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration. They told the lenders they regulate that the institutions' "credit risk management practices have not kept pace with the products' rapid growth and easing of underwriting standards."

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The regulators urged banks, thrifts and credit unions to use particular caution in making loans originated by mortgage brokers, who are not bank employees and who are paid by commission based on the volume of loans they complete.

"For control purposes, the financial institutions should retain appropriate oversight of all critical loan-processing activities, such as verification of income and employment and independence in the appraisal and evaluation function," the guidance said.

Similarly, lenders were also warned to be wary of loans purchased from financial institutions called "correspondents," which make loans on their own for resale to other lenders. Banking regulators noted that correspondents, too, "have an incentive to produce and close as many loans as possible."

Meanwhile, lending institutions should be monitoring the financial health of their home equity customers by periodically checking their credit scores, assessing the way people use their loans, monitoring home values in the neighborhood and using behavioral scoring to identify potential problem accounts. When such problems arise, lenders should refuse to extend additional credit or even reduce the credit limit available, the agencies said.
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