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To: All Credit Union CEOs

From: Matt Beard - Regulatory Specialist
Date: January 26, 2006

RE: Proposed Guidelines on Nontraditional Loans


Note: This new Comment Call format is designed to highlight the key issues associated with the proposed changes, with the option of going to the full description from CUNA. If the topic discussed is of interest, you may click on the link that will take you to the full explanation and questions associated with the changes. If you do not have Internet access, you will receive the CUNA Comment Call along with this document.

EXECUTIVE SUMMARY

The federal financial institution regulators, including NCUA, have issued proposed guidance on residential loans that allow borrowers to defer repayment of principal and/or also allow borrowers to defer interest as well. These nontraditional mortgage loans include “interest only” mortgages in which the borrower has the option to pay no principal for a fixed period of time and “payment option” adjustable-rate mortgages in which the borrower has flexible payment options, including the option to pay less than the interest owed, resulting in negative amortization. Some financial institutions also combine these mortgage loans with other practices, such as making second-lien mortgages simultaneously and accepting reduced documentation in evaluating the applicant’s creditworthiness.

Although the agencies recognize that innovations in mortgage lending may benefit certain consumers, they are increasingly concerned that these lending practices present unique risks that the institutions must manage appropriately. The agencies are also concerned that these loans are being offered to a wide spectrum of borrowers, including sub-prime borrowers and others who may not qualify for traditional mortgage loans or who may not fully understand the risks of these nontraditional loans.

Impact to Credit Unions

This proposed guidance addresses: credit union loan terms and underwriting standards, the appropriate portfolio and risk management practices, and the need for consumers to understand the terms and risks of these loans. The proposed changes are likely to affect loan underwriting, required disclosures, credit union loan policies and procedures, and advertising and communications.

To access the full document, go to : http://www.cuna.org/reg_advocacy/reg_call/rcc_010506.html (You will need your CUNA user name and password.) Comments on the proposed guidance are due by February 27, 2006. Please submit your comments to MCUL by February 17, 2006.

If you have any further questions, or would like to submit a response, please contact me at:

Matt Beard
Michigan Credit Union League
112 East Allegan St., Suite 800
Lansing , MI 48933
e-mail:mob@mcul.org fax: (517) 482-3762

We Appreciate Your Response.

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