Yes, the guidance requires all financial institutions, including banks, savings banks and savings associations, to focus on the following subjects and apply the relevant ones to their existing policies and procedures:
(1) Help borrowers understand ARM risks, including:
(a) Low initial payment;
(b) High or unlimited reset rate caps;
(c) Low or no documentation loans;
(d) Problems of frequent refinancing;
(e) Risk layering;
(f) Simultaneous second lien loans;
(g) Prepayment penalties;
(h) FDIC or FRB prohibited practices (banks, savings banks and savings associations).
(2) Understand portfolio and risk management practices, including:
(a) Relationship between subprime lending and predatory lending;
(b) Risks of loans based on foreclosed or liquidation value;
(c) Problem of loan "flipping";
(d) Fraud detection;
(e) Use of qualifying standards;
(f) Maintenance of appropriate capital levels;
(g) Use of appropriate allowance for loan and lease loss levels;
(h) Risks of stated income loans.
(3) Underwriting standards.
(4) Workout arrangements.
(5) Consumer protection principles, including:
(a) Use of a summary disclosure form;
(b) Avoidance of steering borrowers to inappropriate products;
(c) Explanation of payment shock risk;
(d) Explanation of prepayment penalty;
(e) Explanation of balloon payment;
(f) Explanation of costs of low documentation or stated income loans;
(g) Compliance with the Truth in Lending Act and other federal requirements;
(h) Importance of good consumer communications in promotional materials and product descriptions;
(i) Explanation of borrower responsibility for taxes and insurance.
(6) Development and maintenance of strong internal controls, including:
(a) Management of deals with third-party originators;
(b) Management of secondary market risk;
(c) Effective management information and reporting;
(d) Use of stress testing and performance measures;
(e) Actual practices consistent with policies.