Income Checks Needed for Loans, Regulator Says

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By Robert Schroeder, MarketWatch

RISMEDIA, May 25, 2007-(MarketWatch)-Banks need to know a potential borrower’s real-not stated- income when a subprime loan is applied for, a top U.S. banking regulator said Wednesday, as problems in the subprime mortgage market persist.

“What we need to make clear,” said Comptroller of the Currency John Dugan, “is the principle that a lender, in underwriting a mortgage loan, must assess not just a borrower’s will to make timely payments on the loan, but also his or her capacity to do so.”

In prepared remarks to the Neighborhood Housing Services of New York, Dugan said borrowers’ inflating of their income has become “widespread” in the riskier segments of the mortgage market.

Federal regulators are crafting guidance for lenders about subprime loans, which are extended to borrowers with poor credit. Subprime delinquencies have jumped in the U.S. as interest rates have climbed and house prices stopped rising.

While Federal Reserve Chairman Ben Bernanke has said the problems in the market don’t appear to significantly threaten the U.S. economy, regulators are now reviewing comments about the proposed guidance.

Dugan said stated income should be part of that guidance.

For a lender to know a borrower’s capacity to repay a loan, he said, “the lender generally needs to know the borrower’s income-and I mean real, documented income, not a number that the borrower or loan originator can pull out of the air.”

Lawmakers, regulators and industry groups are intently focused on the subprime mortgage market. On Monday, mortgage and other banking and financial-services trade groups urged federal regulators to establish a uniform standard for both banks and non-banks that make subprime loans. Neither recently proposed federal subprime-loan guidance nor nontraditional mortgage guidance applies to non-bank lenders.

Meanwhile, Sen. Charles Schumer, D-N.Y., and others are seeking to force brokers and originators to assess a borrower’s ability to repay a loan before taking one out. A bill authored by Schumer also seeks at least $300 million in federal funds for community groups that specialize in foreclosure prevention.

Robert Schroeder is a reporter for MarketWatch in Washington.

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