In a move that seems designed to protect savings institutions that sell home loans, the Office of Thrift Supervision (OTS) has issued revised guidance to its regulatees with respect to making home loans, especially those that are destined to be sold in the secondary market, including to government-sponsored entities. In Regulatory Bulletin 37-24, the OTS refined the guidance that it issued in March 2007 (Regulatory Bulletin 37-18) to make clear that "it has been and remains OTS policy that savings associations use prudent underwriting and documentation standards for all loans they originate, both for those to be held in portfolio and those originated for sale."
In the new bulletin the OTS reminds savings institutions that they are exposed to risk on loans sold to the extent that such loans may be "put back" to the institution. For example, many contracts between selling institutions and buyers provide that if the loan defaults within 120 days, the buyer may "put back" the loan to the seller. Other "put back" remedies may also apply depending on the provisions of the contract between the selling institution and the buyer.
It does appear, however, that institutions do not have to use precisely the same underwriting standards for loans for portfolio versus loans intended to be sold. Thus the OTS stated that "OTS expects that loans originated for sale will be underwritten to comply with both the institution’s Board-approved loan policies for such programs and with all existing regulations and supervisory guidance governing the documentation and underwriting standards for residential mortgages." (Emphasis added.) The upshot appears to be that the standards may differ as long as "existing regulations and supervisory guidance" are followed. The concern appears to be that institutions not be caught with unacceptable loans in the event that their pipeline becomes unsaleable.
OTS stated that "experience has shown that the level of pipeline, warehouse, and credit-enhancing repurchase exposure for mortgage loans originated for sale to non-government sponsored enterprise purchasers can constitute a concentration risk.... Given the concentration risk, the Board-approved loan policy should establish a limit for aggregate pipeline, warehouse, and credit-enhancing repurchase exposure from such lending programs. A savings association will receive closer supervisory review of its concentration risk when such exposure exceeds its Tier 1 capital."