On August 21, 2017, the Office of the Comptroller of the Currency (OCC) published Bulletin 2017-28 regarding higher-loan-to-value (LTV) lending programs (the “Bulletin”).  Recognizing the need for further revitalization efforts in distressed communities, the Bulletin addresses how banks may establish mortgage lending programs for loans to finance the purchase, or the purchase and rehabilitation, of one-to four-unit residential properties located in certain communities when the LTV ratio at origination exceeds 100 percent.

Program Requirements

Program loans must be originated as higher LTV first lien mortgage loans, without mortgage insurance, readily marketable collateral, or other acceptable collateral, and with an original loan balance of $200,000 or less.  The owner-occupied residential property secured by a program loan must be located in a community that has been officially targeted for revitalization by a federal, state, or municipal governmental entity or agency, or by a government-designated entity such as a land bank.  The aggregate level of committed program loans should not exceed 10 percent of the bank’s tier 1 capital.

The Bulletin provides that program policies and procedures must be maintained apart from a general lending policy and must be approved by the bank’s board of directors or designated committee.  These policies and procedures must include detailed information regarding program loans, including but not limited to underwriting standards and approval processes, and credit administration requirements.  The policies and procedures also must address compliance with applicable laws, including the Truth in Lending Act (TILA) ability to repay rule.

The Bulletin also imposes certain disclosure requirements.  For example, borrowers must be informed that the market value may continue to be less than the original loan amount at origination and for the duration of the loan, and that this may affect the property’s saleability.

Supervisory Provisions

Per the Bulletin, a bank must notify the OCC at least 30 days before the bank intends to begin originating program loans or to make any substantive change to a previously submitted program.  This notification must include a copy of the program policies and procedures, and the date they were approved by the bank’s board (or designated committee).

Upon receiving this notification, examiners will evaluate the program for compliance and may request clarification or changes before the bank’s first origination (or substantive change) of a program loan.  At subsequent examinations, examiners will monitor and evaluate, among other things, the program’s performance, as well as the bank’s risk management and internal reporting efforts.  The Bulletin states that examiners may review individual program loans to assess asset quality, credit risk, and consumer compliance.  Examiners will also consider whether the program is achieving its intended purpose of revitalizing distressed communities.  The OCC acknowledges that these revitalization efforts may take years to affect change.

The OCC warns that it may amend or rescind the Bulletin, but that any such rescission or change would only affect the origination of new higher LTV loans.  The OCC also states that banks may consider innovative efforts at revitalization “that fall outside the scope of this bulletin, as long as such efforts are consistent with safe and sound lending practices, promote fair access to credit and fair treatment of borrowers, and comply with all applicable laws.”

Despite the OCC guidance, banks may be hesitant to adopt a rehabilitation loan program for making loans subject to the TILA ability to repay rule without applicable guidance from the CFPB.