The Office of the Comptroller of the Currency is asking banks to maintain strict lending standards for a kind of unconventional mortgage that’s focused on the borrower’s assets.
According to the federal regulator, so-called asset-depletion loans are growing fast in the subprime lending market. These loans let borrowers draw upon their assets, instead of their income, when applying for a mortgage.
Asset-depletion loans were created for those who don’t receive a conventional paycheck, such as the self-employed or retirees, the Wall Street Journal reported. They used to be targeted mainly at high-net-worth individuals, but in recent years lenders have begun making the loans available to a broader set of consumers.
“As banks have expanded [asset-depletion underwriting] to qualify other applicants, examiners have noted weaknesses in policies and practices,” Richard Taf, OCC’s top credit-risk official, said in a statement. He urged banks to “develop and implement policies, processes, and control systems in a manner consistent with safe and sound banking practices.”
The OCC says banks should tighten underwriting standards on asset-depletion loans to ensure they don’t overestimate their borrower’s ability to draw from their assets when paying the mortgage.
“It’s a bit of a warning to banks,” said Kris Kully, a Mayer Brown LLP partner. “We understand that this type of underwriting can be reasonable, but don’t forget that you need to dot your i’s and cross your t’s.”
In the second quarter, lenders issued $12 billion in unconventional loans, up 9% from a year ago, according to Inside Mortgage Finance.