Comptroller of the Currency John Dugan on Wednesday warned about the danger of accepting stated income for subprime borrowers and said the practice should be addressed in regulators' final subprime guidance.
The guidelines proposed in March said stated income should only be accepted if mitigating factors clearly minimize the need for direct verification of repayment capacity.
Separately Wednesday, Office of Thrift Supervision Director John Reich said the final subprime guidance would be out in the next few weeks, and should give lenders flexibility in rewriting subprime loans scheduled to reset in the next year.
"There is a concern among institutions that they need to have some flexibility in rewriting these loans when they reset, that if they have to rewrite in accordance with the original guidance that their borrowers may not be able to afford those payments," he said. "So I think we're going to have to consider in the guidance what flexibility...should we give to lenders to redo loans currently on their books."
According to Mr. Dugan, lenders accepted stated income in nearly 50% of all subprime loans made last year.
In a speech to Neighborhood Housing Services in New York, Mr. Dugan said stated income should rarely be accepted on subprime loans. "The higher a loan's credit risk, either from loan features or borrower characteristics, the more important it is to verify the borrower's income, assets, and outstanding liabilities — and, by definition, subprime loans as a class present elevated credit risk."
Mr. Dugan said the practice is a temptation for fraud and undermines transparency. "We are seeing the consequences of stated-income loans in a market where house prices are declining or failing to increase," he said. "These consequences have been increased delinquencies and foreclosures."
Regulators should crack down harder on stated-income loans when they complete their subprime mortgage guidance, he urged, but he did not specify how they should do so.
