On May 29 federal banking regulators published illustrations for lending institutions to use when providing consumer information on hybrid adjustable rate mortgage loan products. The document is intended to assist home loan providers in implementing subprime lending guidance recently published by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation and the National Credit Union Administration.

The illustrations contain a narrative and a chart intended to explain some of the key features of hybrid adjustable rate mortgage loans. The narrative emphasizes term and loan features that borrowers should understand, including escrow payments, prepayment penalties, balloon payments, and premiums for no-documentation or low-documentation loans. The chart contains numerical examples that compare a fixed rate mortgage loan and a "2/28" mortgage loan, in which interest rates change after the first 2 years, and a fixed rate mortgage loan and a "5/25" mortgage loan, in which interest rates change after the first 5 years.

Use of the illustrations is optional among lenders. However, the agencies noted that some institutions may not want to bear the costs of developing their own consumer information in response to the July 2007 guidance on subprime lending. While these illustrations apply only to sub-prime loans, we believe it is good practice for residential mortgage lenders to provide them on all adjustable rate mortgage loans.

Authored by:

David H. Sands

(213) 617-5536

dsands@sheppardmullin.com

and

Sherwin F. Root

(213) 617-5465

sroot@sheppardmullin.com