May 23 (Bloomberg) -- U.S. Comptroller of the Currency John Dugan said new guidelines for subprime lenders should restrict the practice of giving mortgages to people without verifying their income.

``Stated income'' lending, which lets borrowers buy homes without ensuring they can pay for them, accounted for nearly 50 percent of subprime mortgages last year, Dugan said today in a speech to the Neighborhood Housing Services of New York.

``All of us have been troubled by the recent spike in delinquencies and foreclosures, and it seems clear that one reason for the trend is the increased reliance on stated income in subprime mortgages,'' Dugan said in prepared remarks.

The Office of the Comptroller of the Currency, the Federal Reserve and other U.S. regulators in March proposed guidelines that would direct banks to give clearer information on loan risks and ensure borrowers can repay. Dugan said stated-income mortgages should be addressed ``even more strongly'' in the subprime guidelines than in others regulators have issued.

``What we need to make clear, I believe, is the principle that a lender, in underwriting a mortgage loan, must assess not just a borrower's will to make timely payments on the loan, but also his or her capacity to do so,'' Dugan said.

Subprime loans have often been made in haste without regard for reasonable underwriting standards in recent years, Dugan said. And stated-income borrowers, who pay higher interest rates than people who provide W-2 forms or other types of pay verification, often falsify their earnings to get loans for more expensive homes than they would otherwise qualify for, he said.

`Outright Fraud'

``Stated income is too great a temptation for misrepresentation and, in its most extreme form, outright fraud,'' Dugan said.

A 2006 study cited by the Mortgage Asset Research Institute showed that almost 60 percent of stated income loans were exaggerated by at least 50 percent.

Lenders are responsible for their underwriting standards and should ensure they have enough information to make a sound judgment on a borrower's ability to repay, Dugan said.

John Robbins, chairman of the Washington-based Mortgage Bankers Association, said the stated-income loans are useful for self-employed borrowers and others whose income is difficult to substantiate. He cautioned against regulation ``that isn't needed.''

Dugan and other bank regulators have been criticized by members of Congress and consumer groups who contend lax oversight helped set the stage for the surge in defaults and foreclosures resulting from the subprime mortgage meltdown.

Prodded by Dodd

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat who is seeking the party's 2008 presidential nomination, sent a letter to regulators last week prodding them to quickly finish work on the subprime guidelines.

At a March hearing in Washington, Dodd assailed regulators for doing too little to address abusive mortgage lending, saying ``they were spectators for far too long.''

Subprime mortgages typically carry rates 2 or 3 percentage points above those for prime loans. Borrowers typically have poor credit histories or high debt relative to income.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: May 23, 2007 08:33 EDT