The senior lender at ABC bank would like to make stated income mortgage loans (i.e., loans where the bank does not verify the applicant's income) to mortgage customers, including subprime borrowers. Under the statement on subprime mortgage lending, which of the following is the best statement of the bank's responsibility regarding this new program?
When considering stated income mortgage loans, particularly to subprime borrowers, the bank must ensure it has a comprehensive policy in place to manage and mitigate the associated risks. The best approach involves implementing a policy that addresses and mitigates these risks effectively. This could include evaluating other aspects of the borrower's financial stability, requiring larger down payments, or other mitigating factors to ensure the bank manages the higher risks involved appropriately. Hence, creating a robust risk management framework for such loans is crucial.
The best statement of the bank's responsibility regarding a program for stated income mortgage loans, especially when including subprime borrowers, according to the 2007 interagency statement on subprime mortgage lending, would be B. The bank should make a policy for this program that includes mitigating factors for the risks. This statement emphasizes the need for institutions to implement strong risk management practices when offering products that may carry higher risk, such as stated income loans to subprime borrowers. Such policies should address the elevated risks inherent in these loans, including the lack of verification of a borrower's income, which can increase the likelihood of default. By incorporating mitigating factors, such as considering other aspects of the borrower's financial situation or requiring larger down payments, the bank can help manage and mitigate the risks associated with these loans.