BofA marks end of mortgage era with plans for higher standards for Countrywide loans

Bank of America said Tuesday that it will have tighter lending criteria for Countrywide mortgages when it acquires the troubled lender later this year.

The bank will also stop offering subprime mortgages and so-called option adjustable-rate mortgages. Option ARMs have been widely criticized because the loan balance can rise over time if borrowers opt to make the lowest mortgage payment allowed.

BofA will also curtail low-documentation and no-documentation loans, which require little if any proof of assets or income. Some have dubbed such mortgages liar loans.

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"We recognize this tightening, by definition, restricts the availability of credit to some borrowers," said Bruce Hammonds, BofA's global consumer credit executive. "However, this will help ensure that those who get loans can afford to repay them."

California's largest bank disclosed its plans to implement stricter lending guidelines following its purchase of Countrywide as part of its testimony before the Federal Reserve in Chicago.

BofA also plans to adopt measures to help protect borrowers from huge prepayment penalties and payment shocks when adjustable rate mortgages re-adjust.

Countrywide (NYSE: CFC) was the nation's largest mortgage lender during many of the housing market's boom years as the company adopted increasingly innovative and aggressive loan offers.

BofA's (NYSE: BAC) charitable foundation and Countrywide also plan to make $35 million in grants and low-cost loans to help nonprofits seeking to prevent foreclosures and to buy vacant houses in an attempt to stabilize neighborhoods hard hit by foreclosures.

Separately, Bank of America CEO Ken Lewis told American Banker April 21 that he remains committed to the Countrywide acquisition at the current price of $4 billion. He held the door open to the possibility the price could be altered between now and early July if market conditions change.

Despite the bank's full plate with the integration of LaSalle Bank in Chicago and Countrywide later this year, Lewis expressed interest in participating in a Federal Reserve-led rescue of a banking company "if it became available at a big discount."

Such a deal would require the Fed to make an exception to the 10 percent regulatory cap on the amount of U.S. deposits a bank can hold. BofA has been brushing up against that cap for years.

If the Fed does orchestrate a rescue of a major bank, BofA will have plenty of competition for participating in the deal. Wells Fargo (NYSE: WFC) CEO John Stumpf also expressed his willingness to participate in a Fed-assisted acquisition in an interview with the San Francisco Business Times last month.