U.S. Warns Lenders to Elevate Standards

At a time when rising interest rates threaten to push high-risk borrowers into financial turmoil, federal banking regulators have urged lenders to be cautious in approving applications for home-equity loans and credit lines and to review interest-only and no-documentation loan products or face the possibility of increased government oversight.

The guidance was issued by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision, and the National Credit Union Administration in response to inadequate credit risk management policies, high demand for innovative mortgage products, and lax underwriting standards.

The agencies also warned lenders to be cautious when dealing with mortgage brokers and "correspondent" institutions, as their compensation is tied to loan volume. They further suggested that lenders frequently check consumer credit scores, determine how loans are being used, implement behavioral scoring, track neighborhood home values, and stop offering credit or raising credit limits when borrowers show signs of distress.

Douglas Duncan, chief economist for the Mortgage Bankers Association, says the tightened standards could "curtail the appetite of some lenders for taking risks and if it does, it would reduce the credit supply to some consumer groups."