WASHINGTON–CUNA has written the Federal Reserve Board in favor of curbing certain predatory lending practices in light of the board's recent hearings on home equity lending.
CUNA wrote that it backs restricting prepayment penalties and a prohibition on these penalties for loans that target subprime and first-time borrowers. Enhanced disclosure of prepayment penalties might also be prudent.
The credit union trade also supported requirements in underwriting to consider a borrower's ability to repay the taxes and insurance and that escrow accounts are the best way to ensure payment. "We believe that the disclosure of the loan payments should indicate whether this includes tax and insurance payments," CUNA's letter read.
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In particular, regarding adjustable-rate subprime mortgages, the institutions should have to evaluate the borrower's ability to repay the loan at the fully indexed rate, which would not be a bad idea for other home loans as well.
CUNA also agreed that subprime loans should be subject to a rebuttable presumption that a loan is unaffordable if the debt-to-income ratio exceeds 50% and the burden of overcoming the presumption is considerable. "We certainly believe this presumption is generally appropriate for subprime borrowers. This presumption would also be appropriate for prime loans in many situations. However, we envision that there may be situations in which such a limit would not be necessary, such as when the borrower has a very high level of income or significant investments."
While there are certain instances where low-doc loans might be appropriate, subprime borrowers do not generally fit that category.
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