OCC Issues Mortgage Lending Bulletin Concerning High-LTV Loans

by Goodwin

On August 21, 2017, the Office of the Comptroller of the Currency (OCC) issued Bulletin 2017-28, providing risk management guidance to financial services lenders that want to establish community redevelopment programs that offer residential mortgage loans with loan-to-value (LTV) ratios that exceed 100 percent at origination (“high-LTV loans”).

Since the onset of the financial crisis, financial institutions have partnered with community and other organizations in an effort to revitalize communities that were hardest hit by the crisis.  Mortgage lending in these depressed communities can be difficult, however, because the low market value and/or poor condition of the housing stock can make it nearly impossible for banks to offer loans within the constraints of traditional LTV requirements.  One way that banks solve this problem is by making use of exceptions to standard LTV limits to offer loan products to buyers of distressed properties.  Recognizing this, the OCC Bulletin offers guidance to banks regarding circumstances under which banks may develop high-LTV lending programs in communities targeted for revitalization.

The OCC has established certain program criteria for originating high-LTV loans.  Those criteria include:

  • Loan Characteristics.  The loan should be a permanent first-lien mortgage that finances an owner-occupied residence and has an LTV ratio at origination of above 100 percent.  The original loan balance should be $200,000 or less.  The loan should not have mortgage insurance or other collateral that is typically required for loans with LTVs that exceed 90 percent.
  • Community Eligibility.  The community in which the property securing the high-LTV loan is located should be “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.”
  • Policy and Procedure Requirements.  Banks should implement policies and procedures that address high-LTV loans specifically and that include guidance regarding portfolio management, underwriting standards, loan characteristics, community revitalization goals, appraisal and evaluation criteria, credit requirements, compliance, notices related to program loans, borrower incentives, and monitoring and internal reporting requirements.
  • OCC Notice.  Banks should notify the OCC in writing 30 days or more before they initiate or make any changes to high-LTV loan programs.

After being notified that a bank plans to implement a high-LTV loan program, the OCC will monitor the program to ensure compliance with the Bulletin.  Among other things, OCC examiners may review: (1) whether the program sufficiently manages the risks associated with originating high-LTV loans; (2) the performance of loans in the program, including whether delinquent loans are managed in accordance with relevant OCC guidance and applicable laws such as Regulation X (12 C.F.R. Part 1024) and Regulation Z (12 C.F.R. Part 1026); and (3) the bank’s reporting of program performance.  The OCC also will conduct an annual evaluation of the program’s contribution to community revitalization, including the program’s effect on housing markets.

Banks that originate high-LTV loans in distressed communities, or that are considering implementing a program for lending in such communities, should familiarize themselves with OCC Bulletin 2017-28 and ensure that their high-LTV loan programs are compliant with its guidelines.

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.

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