our bank is expanding its subprime loan portfolio. we make these loans on a "no documentation" basis (ie. employment, income not verified). of course, a higher rate is charged for these loans. we rely on the property value in making these loans.

banking agencies have stated that they may take issue with loans that do not take into account the borrowers ability to repay (expanded regulatory guidance subprime loans dtd 1-31-01. do you offer subprime no doc loans? if so, how do address regulatory concerns such as borrowers credit wortiness? thx.

Anon,

If your subprime loans are also High Cost loans (HOEPA and Section 32)you have a TIL issue...
(a) Prohibited acts or practices for loans subject to Sec. 226.32. A creditor extending mortgage credit subject to Sec. 226.32 shall not--
(4) Repayment ability. Engage in a pattern or practice of extending credit subject to Sec. 226.32 to a consumer based on the consumer's collateral without regard to the consumer's repayment ability, including the consumer's current and expected income, current obligations, and employment. There is a presumption that a creditor has violated this paragraph (a)(4) if the creditor engages in a pattern or practice of making loans subject to Sec. 226.32 without verifying and documenting consumers' repayment ability.

The way you are making subprime loans sounds much like the typical underwriting (or lack thereof) for payday loans. Take a look at the FDIC's recent guidance on payday lending and how they will examine for payday loans. They are likely to take the same approach with your subprime portfolio. Also look at the interagency subprime exam guidelines. They will look at this portfolio with a fine-toothed comb.

I don't draw the same correlations between subprime real estate lending and payday lending. Nonetheless, if you're a national bank (and perhaps even if you aren't) I would also pay close attention to the OCC's recently released Notice of Proposed Rulemaking, where the agency is proposing changes to their real estate lending rules. The changes speak directly to subprime, collateral-based real estate lending.