Bank's Responsibility for Stated Income Mortgage Loans

B

The senior lender at ABC bank is considering making stated income mortgage loans to mortgage customers, including subprime borrowers. A stated income mortgage loan is one where the bank does not verify the applicant's income. This type of loan is considered to be a higher risk loan, particularly when it is made to subprime borrowers. The question is asking which of the following statements best reflects the bank's responsibility regarding this new program.

The correct answer is B. The bank should make a policy for this program that includes mitigating factors for the risks. The statement on subprime mortgage lending recognizes that subprime lending can be a valuable tool for expanding access to credit, but it also recognizes that it can be risky if not managed carefully. Therefore, it is the responsibility of the bank to create a policy that includes mitigating factors for the risks associated with stated income mortgage loans to subprime borrowers.

Answer A, "Due to the risks, it should not implement such a program for subprime borrowers," is not the best answer because it does not take into account the potential benefits of subprime lending or the fact that subprime lending can be managed through careful policies and procedures.

Answer C, "The bank should set stringent debt-to-income ratios for these loans," is not the best answer because it only addresses one aspect of risk management for subprime lending. While setting stringent debt-to-income ratios may help to reduce risk, it is not a comprehensive policy.

Answer D, "The bank should establish workout procedures for such loans in advance of making them," is not the best answer because it only addresses the bank's responsibility after the loan has been made, rather than before. While having established workout procedures is important, it is not enough to mitigate all the risks associated with subprime lending.