Following again in the footsteps of federal regulators, state financial overseers are bringing new subprime regulations to state lenders not regulated by the feds.

As of July 20, mortgage regulators from 26 states and the District of Columbia have agreed to implement "CSBS/AARMR/CACCA Guidance on Sub-prime Mortgage Products and Lending Practices" a state-level adaptation of the provisions in the federal"Statement on Subprime Mortgage Lending".

More states are expected to follow.

"We believe a coordinated effort among federal and state regulatory agencies is necessary to provide consistent and effective overall supervision of the mortgage industry," said Jeff Vogel, Wyoming State Bank Commissioner and current Chairman of CSBS.

On the state level, the joint effort was the work of the Conference of State Bank Supervisors (CSBS), the American Association of Residential Mortgage Regulators (AARMR) and the National Association of Consumer Credit Administrators (NACCA).

The state provisions generally mirror the federal edict presented by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision and the National Credit Union Administration, federal monetary system regulators.

For the subprime lending industry, the mandates call for clear and effective management practices, underwriting standards, and consumer protection provisions that institutions must follow when marketing and selling to subprime borrowers, including:

• Curtailing predatory lending. Loans should be based on the borrower's ability to pay rather than the foreclosure or liquidation value of the home.

• Tightening underwriting controls. Loan approval should be based on the borrowers ability to pay the loan based on the fully indexed rate, not the starter rate.

  Predatory lending, poor underwriting habits and other industry behavior has left consumers suspicious about the lending process.

  More than one in five adults, 22 percent, are convinced mortgage advertising and marketing is not credible, according to a Harris Interactive poll.

• Offering workouts. Where warranted, lenders are encouraged to offer struggling borrowers loan modification or workout arrangements.

  Studies have shown, even with recent federal, and now state regulatory upgrades, an estimated 2 million homeowners will lose their homes to foreclosure caused by lending behavior the new rules seek to cure. Future borrowers, however, will enjoy better protection.

• Improving disclosures. Disclosures shouldn't be misleading, mystifying or unclear but spell out in understandable terms the costs, details and risks of loan products so that the borrower is better equipped to choose a loan that is best for him or her.

A recent Federal Trade Commission study "Improving Consumer Mortgage Disclosures -- An Empirical Assessment of Current and Prototype Disclosure Forms" found that 30-year old mortgage disclosures aren't adequate for today's complex mortgages and can actually heighten the risk that a consumer will choose the wrong loan.

State mortgage regulators modified the federal statement to address issues particular to non-depository mortgage lenders and brokers who originate loans but do not hold them in portfolio. These lenders are generally licensed and regulated by the states.

Beyond the state version of subprime rules, state regulators also plan to soon issue "examination guidance" for state regulators to use in evaluating state-licensed mortgage lenders' compliance with the new requirements on lending to sub-prime borrowers.

The state follow up to the federal subprime rules comes on the heels of a similar action "Guidance on Nontraditional Mortgage Product Risks" prompted by the feds' "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending" which presented new guidance for nontraditional mortgages and home equity loans.

Published: July 25, 2007

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.