Federal regulators describe safety and soundness and consumer protection standards that institutions should follow to ensure borrowers obtain loans they can afford to repay. In particular, the regulators are concerned with ARM products offered to subprime borrowers that have any of the following characteristics:
- Low initial payments based on an introductory rate that expires after a short period;
- Very high or no payment amount or the interest payment or rate caps;
- Limited documentation of borrowers’ income;
- Product features likely to result in frequent refinancing to maintain an affordable payment;
- Substantial prepayment penalties and/or prepayment penalties that extend beyond the initial fixed irate period.
Products with these features present risks to both consumers and lenders. These risks are increased if borrowers are not adequately informed of the product features and risks.