Mortgage Banking Takes Center Stage At OCC

by Pepper Hamilton LLP

On February 7, 2014, the Office of the Comptroller of the Currency (OCC) published a 232-page Mortgage Banking component to the Comptroller’s Handbook, its primary source of guidance for national banks and federal savings associations. Mortgage banking has not been comprehensively addressed by the OCC since 1996. This publication also replaces the Mortgage Banking section of the Examiner’s Handbook published in 2008 by the former Office of Thrift Supervision.

A Mortgage Banking Primer for Banks

From the outset, the OCC recognizes that the Consumer Financial Protection Bureau (CFPB) has issued an array of regulations, guides and examination procedures covering various aspects of mortgage banking that govern its constituent institutions, yet it makes clear that this booklet is not intended to address the specific requirements established by the CFPB. Nonetheless, the OCC leaves no room for doubt that it subscribes to the same principles of safety and soundness reflected in the CFPB rules.

Ratcheting Up Enforcement

Banks would be well-advised to recognize that the reinforced focus on mortgage banking is not the OCC’s alone. Because the CFPB is not given direct enforcement authority over banks with less than $10 billion in assets, it is not readily apparent that the CFPB, with its substantial resources, has considerable influence in this sphere of compliance. As intended by its enabling law, the CFPB rides alongside the OCC and the other federal banking agencies in examining operational deficiencies, as well as issues brought to light by consumer complaints at banks of all sizes. More than that, in practice the OCC and other agencies often defer to the CFPB in meting out enforcement action. This fact becomes all the more important in light of recent CFPB statements indicating a growing concern over widespread failure to observe heightened consumer protection standards for conduct of the mortgage banking business.

Managing Profitability

Recognizing that mortgage banking is a cyclical business where earnings can be volatile, the OCC underscores its expectation that a bank’s board and senior management will allocate significant oversight to ensuring consistent profitability. Careful management of mortgage banking includes monitoring of earnings in each segment of operations, structuring operations so that expenses move in scale with volume, and balancing outsourcing strategies with maintenance of a core group of high-quality back-office personnel for production and servicing in both the primary and secondary markets.

The OCC makes a special point that, to effectively manage profitability, management needs to develop a cost center reporting system that aggregates the individual components of the mortgage banking operation. This business-line profitability reporting system breaks out key income and expense metrics and, because of today’s greater complexity and competitiveness of mortgage banking, the OCC encourages detailed stratification of segment components (e.g., breaking down production into retail, wholesale, and Internet; secondary marketing into derivative recognition, hedging impact, recourse, and indemnification impact and gain/loss-on-sale recognition; and servicing into mortgage servicing rights (MSR) valuation changes, hedging activities, and portfolio types). A special caution is given that business-line profitability reporting is very different from parent-affiliate expense-sharing reports and quarterly MSR valuation reports.

Eight Levels of Risk

Considerable attention is devoted to the risks associated with mortgage banking.

  • Credit risk rises as loan quality deteriorates, affecting both the ability to sell originated loans and the market value and profitability of the servicing portfolio. A form of credit risk, concentration risk, arises if loans are concentrated within a geographic region.
  • Interest rate risk affects fee income and reduces the willingness of homebuyers to take loans.
  • Liquidity risk stems from failure to underwrite or service loans according to investor and insurer requirements.
  • Price risk reacts to changes in market factors that affect the buying and selling of loans and MSR.
  • Operational risk reflects the strain on operating systems as supported by internal controls, information systems, employee capability and integrity and operating processes, including oversight of third-party providers.
  • Compliance risk is rooted in standards established by the extensive array of consumer protection laws, with special emphasis on the quality of information given to consumers, deterrence of steering consumers to particular mortgage products, and procedures for promoting fair lending.
  • Strategic risk reflects management’s understanding of market conditions that affect the cost structure and profitability of each major segment of their mortgage banking operations.
  • Reputation risk recognizes how essential public trust can be undermined by negative publicity and market concerns over unfair mortgage lending practices claims, excessive loan defaults, or improperly executed foreclosures.

Centrality of Risk Management

With the framework of the mortgage banking business and its risk carefully constructed, the OCC declares as a cardinal principle its expectation that each bank “identify, measure, monitor and control risk by implementing an effective risk management system appropriate for its size and the complexity of its operations.” Designated as essential for successful risk management are “proper corporate governance, effective policies, strong internal controls, effective compliance management processes, relevant strategic plans, and comprehensive management information systems.” Risk management program components that are extensively discussed and merit careful study include management and supervision, internal and external audits, information technology, loan production activities, secondary marketing, servicing and loan administration, and mortgage servicing assets and MSR.

In addition, a description of Examination procedures provides valuable information, along with useful Appendices analyzing mortgage banking accounting, structures, and risk assessment factors.

Pepper Points

  • Issuance of the publication signals an intensified regulatory focus on mortgage banking activity and should be taken as a strong incentive for banks to reevaluate their policies and procedures in anticipation of revitalized examiner scrutiny and potential enforcement activity.
  • Two powerful forces converged to move mortgage banking to the OCC’s center stage. The Great Recession of 2008-2009 was triggered by the collapse of the mortgage banking bubble, while the legislative response of the Dodd-Frank Act gave the OCC primary supervisory authority over thrifts, the traditional financial mainstay of the housing industry.
  • On February 19, 2014, the deputy director of the CFPB delivered a scathing address to the Mortgage Bankers Association, expressing deep disappointment over the lack of progress in improving the performance of the mortgage banking industry, with particular emphasis on mortgage servicing practices. Citing billions of dollars in penalties already imposed, the official declared, “[W]e will be vigilant about overseeing and enforcing these rules ... We have raised the bar in favor of American consumers and we are ready, willing and able to vigorously enforce that bar.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.