With the subprime mortgage business imploding, federal regulators released a so-called statement on subprime mortgage lending in early March. It says that lenders should ensure that borrowers understand what they're getting into. And it says that the lenders, and the investors who are the ultimate owners of mortgage debt, should know what risks they're taking, too.

The proposed "guidance" falls short of a formal regulation, but just barely. Federal agencies will expect lenders to abide by it. It reminds lenders to inform consumers about the details of the loans they're getting. And it tells lenders not to extend loans to people who can't repay.

From 2004 through 2006, "teaser rates" became popular in mortgages. A teaser rate is a low rate -- sometimes as low as 1 percent -- that lasts a short time. The lowest teaser rates last just a month, while most subprime adjustable-rate mortgages have teaser rates that last two or three years. After the teaser rate expires, rates can rise rapidly, causing minimum monthly payments to skyrocket.

Lenders got into the habit of qualifying borrowers according to their ability to pay the teaser rates, but not by their ability to make payments after payments rose. The regulators' proposed guidance tells lenders to qualify borrowers based upon the "fully indexed rate," which provides the maximum possible payment.

There's a 60-day comment period before the statement is adopted officially.

The Mortgage Bankers Association responded within a couple of hours after the agencies made their proposal.

"It is important to avoid an overreaction to an evolving marketplace or current economic conditions," MBA Chairman John M. Robbins said in a statement. "Overly prescriptive measures run the risk of eliminating valuable financial options that help consumers and support homeownership. We are concerned that the proposed statement, if adopted as proposed, may restrict credit to many consumers in high-cost areas and deny credit to many deserving low-income, minority and first-time home buyers."

Lenders immediately zeroed in on a part of the regulators' statement that recommends that subprime hybrid ARMs be underwritten at their fully indexed rate. For example, a borrower with bad credit might get what's called a 2/28 loan. That's a mortgage with an initial rate that lasts two years, and the rate changes annually after that. Right now, that borrower might start out at 8.5 percent for the first two years. After that, it might have a top possible rate of 14.5 percent.

The feds are telling lenders to give a loan to that borrower only if he or she can afford a payment at that 14.5 percent rate. For a $200,000 loan amortized over 30 years, the monthly principal and interest at 8.5 percent would be $1,538. At 14.5 percent, monthly principal and interest would be $2,449.

An MBA spokesman says people will be locked out of buying houses if they have to qualify at the fully indexed rate.

"When you underwrite at that level, you have the potential to knock a lot of borrowers out of the marketplace," Steve O'Connor, the MBA's vice president of public policy, says in an interview. "The fact is the majority of borrowers who take out hybrid ARMs refinance before the ARM resets -- before the payment escalates."