OCC BULLETIN 2017-28
Subject: Mortgage Lending
Date: August 21, 2017
To: Chief Executive Officers of National Banks and Federal Savings Associations, All Department and Division Heads, All Examining Personnel, and Other Interested Parties
OMB Control No. 1557-0340
Description: Risk Management Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization
The Office of the Comptroller of the Currency (OCC) supports efforts by national banks and federal savings associations (collectively, banks) to assist in the revitalization, stabilization, or redevelopment (referred to in this bulletin individually and collectively as revitalization) of distressed communities through responsible residential mortgage lending. The OCC recognizes that banks and other parties have expressed concern that depressed housing values in certain distressed communities in the United States inhibit mortgage lending in these communities. One way that banks can support revitalization efforts in distressed communities is by offering mortgage products for the purchase of, or the purchase and rehabilitation of, one- to four-unit residential properties. This bulletin provides guidance for managing risks to banks and borrowers associated with programs in which residential mortgage loans are originated when the loan-to-value ratio (LTV) at origination exceeds 100 percent (referred to in this bulletin as higher-LTV loans).
Note for Community Banks
This guidance applies to any OCC-supervised banks wishing to establish a program for originating higher-LTV loans in communities targeted for revitalization. The guidance may offer opportunities for community-focused banks to develop collaborative relationships with one another. Such arrangements should be consistent with the OCC's paper titled "An Opportunity for Community Banks: Working Together Collaboratively," issued on January 13, 2015.1 As noted in the paper, banks should take care to ensure that collaboration with third parties is subject to effective strategic planning, risk management, and oversight.
This bulletin provides guidance regarding the
As described in this bulletin, the OCC will actively monitor and evaluate the programs established by banks, including the performance of higher-LTV loans. Additionally, at least annually, the OCC will assess the extent to which banks' programs collectively are contributing to the revitalization of eligible communities and whether banks are adequately controlling the risks associated with originating higher-LTV loans.
Home values in some U.S. communities remain depressed, in part because of the financial crisis. These depressed home values contribute to creditworthy borrowers experiencing financing difficulties when seeking home loans in those communities.
As these communities work to stabilize home ownership levels and home values, the rehabilitation of abandoned or distressed housing stock is an important component of broader efforts to strengthen communities. Local governments, government-affiliated entities, community-based organizations, financial institutions (including banks), and others have developed creative solutions for some of these challenges. These solutions include strategies for acquiring and rehabilitating properties in communities targeted for revitalization. Community groups, financial institutions (including banks), non-profit organizations, and state and local entities, including land banks, are working together to develop and implement innovative residential mortgage financing to bring needed lending to economically distressed areas. The efforts include providing second-lien loans to finance rehabilitation costs, interest rate discounts, and down payment and closing cost assistance. Additionally, the Federal Housing Administration, Fannie Mae, and Freddie Mac all currently offer rehabilitation financing.2
In addition to participating in these and other third-party efforts, banks have expressed a desire to participate in revitalization efforts of distressed communities by offering their own loan products. The value of the collateral in communities where home values remain depressed often can present challenges to banks' residential lending in part because of current supervisory loan-to-value (SLTV) limits. These SLTV limits generally provide that owner-occupied residential loans with LTVs above 90 percent should have appropriate credit enhancement (for example, mortgage insurance or readily marketable collateral). Distressed sales, including short sales and foreclosures, have negatively affected home values in these communities. Further, in communities with minimal sales activity, finding comparable property sales becomes challenging when appraisals or evaluations are required. All of these factors contribute to buyers of distressed properties experiencing difficulty securing adequate financing to cover the often substantial renovation costs required to make the properties habitable.
The OCC recognizes that supporting long-term community revitalization may necessitate responsible, innovative lending strategies. One way that banks can support revitalization efforts is by lending within established exceptions to the SLTV limits for residential loans. Existing regulations and guidelines recognize that it may be appropriate, in individual cases, for banks to make loans in excess of the SLTV limits, based on support provided by other credit factors.3 The regulations and guidelines also recognize that banks may provide for prudently underwritten exceptions for creditworthy borrowers whose needs do not fit within the banks' general lending policies, including SLTV limits, on a loan-by-loan basis under certain conditions.4 These conditions include that the aggregate amount of all loans in excess of the SLTV limits (which includes higher-LTV loans) should not exceed 100 percent of total capital, that the boards of directors establish standards for reviewing and approving exception loans, and that written justification setting forth relevant credit factors accompany all approvals of exception loans.5 Credit factors for these purposes may include the borrower's capacity to adequately service the debt, the borrower's overall creditworthiness, and the level of funds invested in the property.6
The OCC believes that in some circumstances, a bank also can design a program to offer higher-LTV loans in communities targeted for revitalization in a manner consistent with safe and sound lending practices and current regulations and guidelines. As described in the "Program Criteria" section of this bulletin, such loans may include loans in eligible communities originated in accordance with the bank program's policies and procedures. Important elements of such a program are the bank's policies and procedures for complying with the ability-to-repay standard of Regulation Z7 and the bank's separate underwriting standards and approval processes for higher-LTV loans.
Bank lending under such a program may serve the credit needs of individual borrowers and the community, and the bank may receive Community Reinvestment Act consideration depending on the specifics of the program. The origination of higher-LTV loans is not, however, without risk. Using internal bank data, the OCC will monitor and evaluate the performance of the bank's program loans and how the bank's program manages risks to the bank and its borrowers. For its aggregate assessment, which will occur at least annually, the OCC will evaluate the collective impact of programs offered by all banks. In assessing the impact of one or more programs, the OCC recognizes that revitalization efforts may be a multi-year undertaking.
Please contact Kimberly Hebb, Compliance Risk Policy, at (202) 649-5470; Joseph Smith, Credit Policy, at (202) 649-6670; Krista LaBelle, Community and Consumer Law, at (202) 649-6350; or Ammar Askari, Community Affairs, at (202) 649-6420.
Grace E. Dailey
Grovetta N. Gardineer
1 Refer to OCC NR 2015-1 "Collaboration Can Facilitate Community Bank Competitiveness, OCC Says."
2Programs include the Federal Housing Administration's Limited 203(k) Rehabilitation Mortgage Insurance Program, Fannie Mae HomeStyle Renovation, and Freddie Mac Construction Conversion and Renovation Mortgages.
3 For national banks, refer to 12 CFR 34, appendix A to subpart D, "Interagency Guidelines for Real Estate Lending Policies." For federal savings associations, refer to 12 CFR 160.101, appendix to 12 CFR 160.101, "Interagency Guidelines for Real Estate Lending Policies."
7 The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Truth in Lending Act to require creditors to make a reasonable, good faith determination of a consumer's ability to repay a mortgage loan, absent specified exceptions. Refer to 15 USC 1639c. The Consumer Financial Protection Bureau issued a final rule amending Regulation Z to implement these ability-to-repay requirements, which became effective January 1, 2014. Refer to 78 Fed. Reg. 6621, January 30, 2013.
9 For national banks, refer to 12 CFR 34, "Real Estate Lending and Appraisals," appendix A to subpart D, "Interagency Guidelines for Real Estate Lending Policies." For federal savings associations, refer to 12 CFR 160.101, "Real estate lending standards," appendix to 12 CFR 160.101, "Interagency Guidelines for Real Estate Lending Policies."
10 Banks should retain documentation indicating (1) the eligible community is one targeted for revitalization by a government entity or agency, (2) the specific revitalization criteria used by the government entity or agency, and (3) the type of financing and other support, if any, that the governmental entity or agency provides to the community.
11 For all mortgage loan transactions based on an appraisal, banks should select and engage appraisers with local market competency in valuing the property securing a program loan. Similarly, any evaluation, if applicable, should be credible and consistent with safe and sound banking practices. Given the unique underwriting considerations, banks should not use automated valuation models in connection with these programs.
12 Applicable laws may include (1) Regulation X, 12 CFR 1024, which provides mortgage servicing standards, including early intervention requirements and loss mitigation procedures; and (2) Regulation Z, 12 CFR 1026, which establishes requirements for including delinquency-related information on the periodic statements required for residential mortgage loans.