Since the financial crisis, it has been difficult for consumers and developers to obtain mortgages to buy and build in the areas most hurt by the recession. The Office of the Comptroller of the Currency (OCC) has traditionally held banks to standards that would consider mortgage lending with a loan-to-value (LTV) ratio that exceeds 100 percent at origination (high-LTV loans) as an unsafe and unsound practice. This myopic view does not entirely reflect the facts, and has deprived both banks and consumers of valuable loans.
One way that banks solve this problem is by using exceptions to standard LTV limits to offer loan products to buyers of distressed properties. The OCC has recognized this and, on August 21, issued Bulletin 2017-28, providing risk management guidance to financial services lenders that want to establish community redevelopment programs that offer high-LTV loans. The bulletin outlines program criteria that should be used in creating and maintaining a high-LTV mortgage loan program. These 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 where 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, additional notices and disclosures related to high-LTV 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 a bank notifies the OCC that it 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. pt. 1024) and Regulation Z (12 C.F.R. pt. 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.
OCC Bulletin 2017-28 can help guide banks in recapturing a market segment that has been informally off limits and, in doing so, help out consumers and distressed communities.
Mortgage lenders that are not supervised by the OCC would also do well to heed the guidance laid out in OCC Bulletin 2017-28, since it provides a useful manual for risk mitigation.