Finance and Economic

Bank of America Corp. said Tuesday it will tighten its mortgage lending standards after it completes its acquisition of Countrywide Financial Corp. later this year, and it will stop making one type of loan widely blamed for foreclosures.

The Charlotte, N.C.-based bank’s plans came as part of testimony before the Federal Reserve Bank of Chicago, which held a meeting about the company’s $4 billion deal to acquire the California lender.

Bank of America (BAC, Fortune 500) said it will discontinue so-called option adjustable-rate mortgages, or loans that allow customers to make payments for less than the monthly interest due. Critics say such loans carry higher rates and can cause borrowers’ balances to increase.

The bank said it will also greatly reduce offerings of other nontraditional loans, such as those that allow for little documentation.

Bank of America plans to continue to offer traditional mortgages that fit government-sponsored enterprise guidelines, including FHA and VA loans. It also will offer interest-only fixed-rate and adjustable-rate mortgages that have long reset periods to lessen the likelihood of short-term payment spikes.

It will not originate subprime mortgages, a practice Bank of America dropped in 2001 when Ken Lewis took over as chief executive. The bank called it a business that had "become unattractive from a risk-reward standpoint."

Countrywide (CFC, Fortune 500) is among the dozens of mortgage lenders that have faced an increase in mortgage defaults and foreclosures, especially in subprime loans - those made to borrowers with weak credit faxless online payday advances. Its lending practices have been questioned, and the company faces numerous investigations and lawsuits related to them.

The acquisition is expected to close in the third quarter.

"We think it’s important to clearly explain the changes in mortgage lending practices once we operate as a combined company," Bruce Hammonds, Bank of America’s consumer credit executive, said in a statement. "We recognize this tightening, by definition, restricts the availability of credit to some borrowers."

Like many of the nation’s leading financial institutions, Bank of America has been hit hard by the widespread slump in the nation’s housing market and ongoing credit crunch.

The move will help keep the banking giant - which is set to become the nation’s biggest mortgage lender and loan servicer - away from loans that helped fuel the housing bubble.

Earlier this month, Bank of America’s crosstown rival Wachovia Corp. (WB, Fortune 500) revised the underwriting policies in its mortgage loan business. Among its changes, Wachovia said it will base loan decisions on a new system of rating home markets and will require borrowers to have a minimum qualifying FICO score, a credit rating system used by the vast majority of the nation’s banks to guide their loan decisions. 

Source