On August 21, 2017, the OCC issued guidance permitting national banks and federal savings associations to establish programs to offer mortgages with loan-to-value (“LTV”) ratios exceeding 100 percent in communities that have been officially targeted for revitalization by a federal, state, or municipal governmental entity or agency, or by a government-designated entity.
Under existing supervisory guidance, banks are expected generally to limit the LTV ratios of their owner-occupied residential loans to no more than 90 percent, unless borrowers have credit enhancement in the form of mortgage insurance or readily marketable collateral. The existing guidance recognizes that banks can exceed this limit without obtaining credit enhancement in individual cases, subject to certain conditions. The OCC’s new guidance allows banks’ mortgage loans to have LTV ratios exceeding 100 percent without credit enhancement as part of an overall program of lending in distressed communities. (The new guidance does not explain whether mortgages with LTV ratios between 90 and 100 percent are eligible as program loans.)
Eligible program loans under the guidance are permanent first-lien mortgages with an original loan balance of $200,000 or less that finance the purchase of, or purchase and rehabilitation of, an owner-occupied residential property located in an eligible community. Program loans do not include home equity loans, lines of credit, or refinancing loans.
To make program loans, banks are expected to have specific policies and procedures that address program loans and that are approved by the bank’s board of directors, or an appropriate designee of the board. Among other matters, the policies and procedures must define the geographies of eligible communities in which the bank will make program loans; state the amount and duration of the bank’s financial commitment to the program; and provide a limitation on the aggregate level of committed program loans as a percentage of the bank’s tier 1 capital, which should not exceed 10 percent.
The bank must provide disclosures to program loan borrowers stating that:
- the market value of a property securing a higher-LTV loan is less than the loan amount at origination;
- the market value of a rehabilitated property likely will be less than the original loan amount upon completion of the rehabilitation;
- the market value may continue to be less than the original loan amount thereafter and for the duration of the loan; and
- there may be financial implications for the borrower if the borrower seeks to sell the property and the sale price is less than the outstanding loan balance at the time of such sale, and explain the implications.
A bank that intends to begin originating program loans, or substantively change an existing program, must provide at least 30 days’ prior written notice to its OCC supervisory office.
The guidance cautions that the OCC will evaluate banks’ programs in the aggregate at least annually, and that based on these evaluations, the OCC may amend or rescind the guidance. However, any material amendment or rescission of the guidance will apply only prospectively, to the origination of new higher-LTV loans, and will not result in existing higher-LTV loans made in compliance with the guidance as it existed at the time of loan origination being deemed unsafe or unsound.