Community Developments Investments (February 2018)
OCC Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization
Ammar Askari, Director, Community Affairs Outreach, OCC
Before: Redmellon Restoration & Development took on a major rehabilitation of this abandoned duplex in New Orleans. (Redmellon Restoration & Development)
The Office of the Comptroller of the Currency (OCC) recently issued OCC Bulletin 2017-28, "Mortgage Lending: Risk Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization" to spur community revitalization by national banks and federal savings associations (collectively, banks) that are interested in offering higher-loan-to-value mortgage programs in targeted areas.1 The guidance sets out principles for managing risks to banks and borrowers associated with the origination of higher-loan-to-value mortgage loans to finance the purchase or the purchase and rehabilitation of owner-occupied residential properties in eligible communities. Specifically, the guidance applies to permanent first-lien mortgage loans with loan-to-value (LTV) ratios over 100 percent, without mortgage insurance or other acceptable collateral, and with an original loan balance of no higher than $200,000.
Existing interagency real estate lending guidelines include certain supervisory LTV limitations, including that owner-occupied residential mortgage loans in excess of 90 percent of property value should have appropriate credit enhancements.2 These interagency guidelines also recognize that, evaluated on a case-by-case basis, loans in excess of supervisory LTV expectations can be consistent with safety and soundness standards, provided that banks maintain appropriate risk management controls. OCC Bulletin 2017-28 offers guidance regarding the circumstances under which a bank may establish a program to offer higher-LTV loans in areas targeted for revitalization consistent with safe and sound lending, including certain risk management controls.
The OCC took this step to address concerns that depressed housing values in certain distressed communities may inhibit mortgage lending and slow the recovery of these communities. Home values in some U.S. communities remain depressed, in part because the financial crisis led to an increase in distressed sales, including short sales and foreclosures. Further, in communities with minimal sales activity, finding comparable property sales for appraisals or evaluations may be challenging. These factors contribute to the financing difficulties facing creditworthy borrowers in these communities, particularly when financing must cover the often substantial rehabilitation costs to make properties habitable. In markets where these factors are present, and particularly in communities with low-value properties, supervisory policies addressing maximum LTV ratios can affect mortgage credit availability. By providing mortgage purchase and rehabilitation financing, banks can support efforts to stabilize and revitalize these areas.
OCC Bulletin 2017-28 provides guidance and supervisory expectations for higher-LTV loan programs.3 Before offering a higher-LTV program, a bank should notify the appropriate OCC supervisory office in writing at least 30 days before it intends to begin originating program loans so the agency can assess whether the program is consistent with safe and sound lending practices and that bank management has ensured appropriate controls to manage the risk are in place.
After: The now-purple duplex is elegant inside and out and shows no signs of its former self.Redmellon Restoration & Development ()
The guidance focuses on higher-LTV programs established to extend mortgage loans into communities that are officially targeted for revitalization. This designation can be made by a federal, state, or municipal government entity or agency, or a government-designated agency such as a land bank. By focusing on areas targeted for revitalization, the guidance is intended to carefully stimulate lending activity and encourage improvement in housing values community-wide. The guidance identifies specific policies and procedures banks should include in their programs. The bank should define the geographies where its programs will be active. The bank also should set the program's parameters, including maximum loan size, which should not be greater than $200,000. Additional factors that bank policies and procedures should address include
- the specific revitalization criteria used by the government entity or agency,
- financing incentives and assistance programs available to qualifying borrowers,
- underwriting standards and the approval process for program loans,
- appraisal or evaluation criteria applicable to program loans, and
- compliance with applicable laws and regulations.
Ongoing monitoring and internal reporting are necessary to assess the performance, impact, trends, and success of these programs.
Higher-LTV programs should be designed for borrowers who will occupy the property. The program loan should be a permanent first-lien mortgage, the proceeds of which are used for either the purchase or the purchase and rehabilitation of a property. The higher-LTV program can allow for instances in which a buyer may need to pay cash for a property and secure financing later, provided that the buyer receives a bank loan commitment within six months to cover the purchase price plus projected rehabilitation costs. This flexibility should allow buyers to compete more effectively against investors or bid at property auctions that require cash payment.
While the OCC bulletin is intended to encourage credit availability and reinvigorate neighborhoods, it also addresses potential risks to borrowers who secure higher-LTV loans. At origination, a borrower's mortgage balance will exceed the market value of the underlying property. Until the borrower builds equity, either by paying down principal or through market appreciation, the risk of selling at a loss remains. To ensure that prospective borrowers understand this risk, the bulletin instructs banks to provide notices to borrowers addressing the potential financial risk a higher-LTV loan could present.
Managing Risk, Promoting Success
Appropriate risk management controls are essential to the success of higher-LTV programs. The OCC also expects compliance with applicable laws and regulations. Banks must have sound eligibility, underwriting, and approval standards, as well as strong credit administration processes. These controls are particularly critical for rehabilitation lending.4 In addition to risk controls, ongoing monitoring and internal reporting are necessary to assess the performance, impact, trends, and success of these programs.
The OCC evaluates each bank's higher-LTV program during scheduled supervisory activities. Additionally, the OCC will undertake an annual review to assess the collective impact of these programs on community revitalization efforts. This annual review considers the effect of these programs on housing markets and other economic indicators, and whether banks are adequately controlling the various risks of these loans.
The agency recognizes that meaningful transformation may take a number of years, but there are many ways that community-based organizations can partner with banks to increase the success of higher-LTV programs. Offering homeownership education and home maintenance counseling programs may help borrowers understand potential risks and responsibilities and, ultimately, may improve loan performance.
Many homeowners are unprepared to take on rehabilitation projects, so technical assistance programs to help owners manage this phase could be helpful. Some land banks and affordable housing organizations are managing the acquisition and rehabilitation phases and then selling the property to income-eligible buyers, but this approach is capital intensive.
Community Reinvestment Act Consideration
Banks may earn Community Reinvestment Act (CRA) consideration for higher-LTV loan programs. Loans to low- and moderate-income (LMI) borrowers as well as grants or investments to finance the purchase or rehabilitation of affordable housing may meet the CRA's definition of community development. Loans to, and grants and investments in, financial intermediaries, such as community loan funds or community development financial institutions, may also qualify. Additionally, grants to support the work of nonprofit counseling agencies that serve LMI borrowers may be considered to be CRA-qualified investments.
Higher-LTV loan programs that help to attract new or retain existing residents or businesses in LMI geographies may be considered as community development that revitalizes or stabilizes the LMI area. There is a presumption in the CRA guidance that a lending activity revitalizes or stabilizes an LMI area if the activity is consistent with a bona fide government plan for revitalization or stabilization or a disaster recovery plan for the area. Additionally, higher-LTV loan programs may be considered responsive in helping to meet credit needs in the community, particularly if there is a financial education component. Also, the lending test for large institutions evaluates community development lending, so an examiner may consider the extent to which innovative or flexible terms or products augment the effectiveness of community development loan programs or address credit needs of LMI individuals or areas when evaluating a large bank's community development lending performance.
The OCC's Community Affairs division and our 11 locally based District Community Affairs Officers are resources for banks considering ways to lend and invest in communities. The OCC is ready to provide assistance to banks that are offering or considering higher-LTV loan programs and their community-based partners to enhance the success of this critical work.
For additional information, please contact Ammar Askari at firstname.lastname@example.org.
2 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." The supervisory LTV limits generally provide that owner-occupied residential loans with LTVs above 90 percent should have appropriate credit enhancements.
3 The OCC will consider other bank efforts to support revitalization in distressed communities that fall outside the scope of this bulletin, as long as such efforts are consistent with safe and sound lending practices, promote fair access to credit and fair treatment of borrowers, and comply with all applicable laws and regulations.
4 Loans to an LMI borrower for the purchase or rehabilitation of a dwelling may be considered home mortgage loans under the retail lending test. Banks may not receive consideration for such loans as both home mortgage and community development loans. See "Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Guidance" (Q&As), 81 Fed. Reg. 142, July 25, 2016, Q&As 12(h)-2 and 3, and 43(b)(2)-2.
This publication is part of:
Collection: Community Developments Investments
Letty Ann Shapiro
On the cover
Before-and-after image of a home in New Orleans rehabilitated by Redmellon Restoration & Development, a mission-driven real estate development company.
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.
Articles by non-OCC authors represent the authors' own views and not necessarily the views of the OCC.