The regulatory agencies proposed that an analysis of borrowers' repayment capacity include an evaluation of their ability to repay the debt by its final maturity at the fully indexed rate that takes into consideration rate increases on an adjustable mortgage, for example. For loans such as "option ARMs" that permit negative amortization, or a loan that adds interest and principal to the total loan amount during a period of very low initial payments, the repayment analysis should include the initial loan amount plus any balance increase from negative amortization.

"While similar products have been available for many years, the number of institutions offering them has expanded rapidly," the Office of the Comptroller of the Currency said in a statement. "At the same time, these products are offered to a wider spectrum of borrowers who may not otherwise qualify for a similar-size mortgage under traditional terms and underwriting standards."

In comment letters, consumer groups supported the proposals, the OCC said, while banks and industry groups thought the new underwriting standards too strict and asked for more flexibility.

In a statement, Seattle-based Washington Mutual (NYSE: WM), which has been providing option adjustable rate mortgages (ARMs) for 20 years, said it is still analyzing the new guidance and cannot yet determine what effect it will have on its business. The bank called for all mortgage originators, including those regulated by state authorities, to follow the same guidelines to level the playing field for all lenders and so that consumers receive consistent guidelines.

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