(The news featured below is a selection from the news covered in the Federal Securities Law Reporter.)

Staff Offers Disclosure Guidance For Residential Loan Products 

The Division of Corporation Finance has updated its guidance on current accounting and disclosure issues to include disclosure about residential loan products. The staff noted that, in recent years, lending institutions have increased the number of mortgage loans with features that increase the credit risk for the lender, such as option adjustable rate mortgage products. The staff advised that the types of mortgage loans that are held and the underwriting standards that are used to originate the loans are important to an investor's understanding of a registrant's financial condition and results of operations.

Residential mortgage loans increasingly include features such as the ability to borrow more than 80 percent of the appraised value of a home, often without buying private mortgage insurance, according to the guidance. Borrowers may be permitted to make monthly payments that are less than the interest expense that is incurred on the loan, resulting in a principal balance that increases over time. These loans are often referred to as negative amortization loans. Some borrowers are allowed to qualify for a loan based on the ability to initially make a minimum monthly payment, with significantly higher payments in the future unless the mortgage is prepaid.

The staff noted that option adjustable rate mortgages are offered to home buyers who wish to make smaller monthly mortgage payments. The monthly payments are less than the interest owed on the loan, so the deferred interest is added to the principal amount. If the loan balance increases to the extent that the loan-to-value ratio exceeds an established threshold, the lender may restructure the loan and require the borrower to immediately begin to make larger payments. The staff believes that more detailed information about these types of loans may be needed in order to provide a complete picture of a portfolio's credit risk.

The guidance provides examples of disclosure that could be provided in the description of business or MD&A, as appropriate, such as providing disaggregated information about residential mortgage loans with features that may result in a higher credit risk. Registrants may wish to describe the significant terms of each type of residential mortgage loan product offering and include the underwriting standards for each product, the maximum loan-to-value ratios, and how the credit management monitors and analyzes features such as negative amortization and changes from period to period.

Registrants may wish to describe their policy for placing loans on non-accrual status when the terms allow for a monthly minimum payment that is less than the interest accrued on the loan and how it impacts the non-performing loan statistics. The staff added that registrants may wish to disclose the approximate amount or percentage of residential mortgage loans at the end of reporting periods that have loan-to-value ratios above 100 percent and geographic concentrations of loans with high loan-to-value ratios.

Registrants should consider whether to describe the risk mitigation transactions that are used to reduce credit risk exposure, such as insurance arrangements, credit default agreements or credit derivatives. Registrants should include any limitations to their credit risk mitigation strategies and the impact of credit risk mitigation transactions on the financial statements.

Finally, the staff reminded registrants to disclose trends related to residential mortgage loans with features that may result in higher credit risk and that may have a material impact on net interest income after the provision for loan loss. For example, the guidance suggests disclosing any changes in the percentage of borrowers who have chosen a minimum payment option during the period instead of the full payment of interest or the full payment of the principal and interest. Registrants may wish to report any significant weakening in the local housing markets in which they have a concentration of residential mortgage loans with high loan-to-value ratios and any changes in credit losses and interest income recognized for higher risk loans.