Fed Governor Warns CUs of ‘Risk Layering’

WASHINGTON – Regulators warned credit unions and other lenders yesterday of loading on too much risk with exotic new loan products, a practice known as risk-layering. Federal Reserve Governor Susan Bies told attendees to NCUA’s Risk Mitigation Summit that regulatory supervisors have noticed that lenders are increasingly combining non-traditional mortgage loans with risk layering practices, such as by not evaluating a borrower’s ability to repay the loan. “We are also seeing more frequent use of limited or no documentation in evaluating an applicant’s income and assets,” said Bies, warning that the increasing easing on credit requirements, combined with non-traditional loan products, especially to subprime borrowers, “may generate losses on these products greater than has been observed in the past.” “The greater prevalence of risk-layering practices and sales of non-traditional mortgage products to non-prime borrowers have occurred in the past few years as competition for borrowers and declining profit margins has prompted lenders to loosen their credit standards to maintain loan volume in a slowing environment,” said Bies. She called on credit unions and other lenders to make sure the complexity of these new mortgage products is clearly understood by both the lenders and the borrowers. Other speakers at the event organized by NCUA Vice Chairman Rodney Hood emphasized the need for credit unions to adopt a balanced approach to risk mitigation, no matter how large or small the institutions. Leo Tillman, a senior managing director with Bear Stearns, insisted that even the smallest credit union should be engaged in evaluating and managing the risks.