Appendix C to Part 30 - OCC Guidelines Establishing Standards for Residential Mortgage Lending Practices
12:1.0.1.1.27.0.28.7.15 : Appendix C
Appendix C to Part 30 - OCC Guidelines Establishing Standards for
Residential Mortgage Lending Practices Table of Contents I.
Introduction A. Scope B. Preservation of Existing Authority C.
Relationship to Other Legal Requirements D. Definitions II.
Standards for Residential Mortgage Lending Practices A. General B.
Objectives III. Implementation of Residential Mortgage Lending
Standards A. Avoidance of Particular Loan Terms, Conditions, and
Features B. Prudent Consideration of Certain Loan Terms, Conditions
and Features C. Enhanced Care To Avoid Abusive Loan Terms,
Conditions, and Features in Certain Mortgages D. Avoidance of
Consumer Misunderstanding E. Purchased and Brokered Loans F.
Monitoring and Corrective Action I. Introduction
i. These OCC Guidelines for Residential Mortgage Lending
Practices (Guidelines) set forth standards pursuant to Section 39
of the Federal Deposit Insurance Act, 12 U.S.C. 1831p-1 (Section
39). The Guidelines are designed to protect against involvement by
national banks, Federal savings associations, Federal branches and
Federal agencies of foreign banks, and their respective operating
subsidiaries (together, “national banks and Federal savings
associations”), either directly or through loans that they purchase
or make through intermediaries, in predatory or abusive residential
mortgage lending practices that are injurious to their respective
customers and that expose the national bank or Federal savings
association to credit, legal, compliance, reputation, and other
risks. The Guidelines focus on the substance of activities and
practices, not the creation of policies. The Guidelines are
enforceable under Section 39 in accordance with the procedures
prescribed by the regulations in 12 CFR part 30.
ii. As the OCC has previously indicated in guidance to national
banks and in rulemaking proceedings (OCC Advisory Letters 2003-2
and 2003-3 (Feb. 21, 2003)), many of the abusive practices commonly
associated with predatory mortgage lending, such as loan flipping
and equity stripping, will involve conduct that likely violates the
Federal Trade Commission Act's (FTC Act) prohibition against unfair
or deceptive acts or practices. 15 U.S.C. 45. In addition, loans
that involve violations of the FTC Act, or mortgage loans based
predominantly on the foreclosure or liquidation value of the
borrower's collateral without regard to the borrower's ability to
repay the loan according to its terms, will involve violations of
OCC regulations governing real estate lending activities, 12 CFR
34.3 (Lending Rules).
iii. In addition, national banks, Federal savings associations,
and their respective operating subsidiaries must comply with the
requirements and Guidelines affecting appraisals of residential
mortgage loans and appraiser independence. 12 CFR part 34, subpart
C, and the Interagency Appraisal and Evaluation Guidelines (OCC
Bulletin 2010-42 (December 10, 2010). For example, engaging in a
practice of influencing the independent judgment of an appraiser
with respect to a valuation of real estate that is to be security
for a residential mortgage loan would violate applicable
standards.
iv. Targeting inappropriate credit products and unfair loan
terms to certain borrowers also may entail conduct that violates
the FTC Act, as well as the Equal Credit Opportunity Act (ECOA) and
the Fair Housing Act (FHA). 15 U.S.C. 1691 et seq. 42 U.S.C.
3601 et seq. For example, “steering” a consumer to a loan
with higher costs rather than to a comparable loan offered by the
national bank or Federal savings association with lower costs for
which the consumer could qualify, on a prohibited basis such as the
borrower's race, national origin, age, gender, or marital status,
would be unlawful.
v. OCC regulations also prohibit national banks and their
operating subsidiaries from providing lump sum, single premium fees
for debt cancellation contracts and debt suspension agreements in
connection with residential mortgage loans. 12 CFR 37.3(c)(2). Some
lending practices and loan terms, including financing single
premium credit insurance and the use of mandatory arbitration
clauses, also may significantly impair the eligibility of a
residential mortgage loan for purchase in the secondary market.
vi. Finally, OCC regulations and supervisory guidance on
fiduciary activities and asset management address the need for
national banks and Federal savings associations to perform due
diligence and exercise appropriate control with regard to trustee
activities. See 12 CFR 9.6 (a), in the case of national
banks, and 12 CFR 150.200, in the case of Federal savings
associations, and the Comptroller's Handbook on Asset Management.
For example, national banks and Federal savings associations should
exercise appropriate diligence to minimize potential reputation
risks when they undertake to act as trustees in mortgage
securitizations.
A. Scope. These Guidelines apply to the residential
mortgage lending activities of national banks, Federal savings
associations, Federal branches and Federal agencies of foreign
banks, and operating subsidiaries of such entities (except brokers,
dealers, persons providing insurance, investment companies, and
investment advisers).
B. Preservation of Existing Authority. Neither Section 39
nor these Guidelines in any way limits the authority of the OCC to
address unsafe or unsound practices or conditions, unfair or
deceptive practices, or other violations of law. The OCC may take
action under Section 39 and these Guidelines independently of, in
conjunction with, or in addition to any other enforcement action
available to the OCC.
C. Relationship to Other Legal Requirements. Actions by a
national bank or Federal savings association in connection with
residential mortgage lending that are inconsistent with these
Guidelines or Appendix A to this part 30 may also constitute unsafe
or unsound practices for purposes of section 8 of the Federal
Deposit Insurance Act, 12 U.S.C. 1818, unfair or deceptive
practices for purposes of section 5 of the FTC Act, 15 U.S.C. 45,
and the OCC's Lending Rules, 12 CFR 34.3 (Lending Rules) and Real
Estate Lending Standards, 12 CFR part 34, subpart D, in the case of
national banks, and 12 CFR 160.100 and 160.101, in the case of
Federal savings associations, or violations of the ECOA and
FHA.
D. Definitions.
1. Except as modified in these Guidelines, or unless the context
otherwise requires, the terms used in these Guidelines have the
same meanings as set forth in sections 3 and 39 of the Federal
Deposit Insurance Act, 12 U.S.C. 1813 and 1831p-1.
2. For purposes of these Guidelines, the following definitions
apply:
a. Residential mortgage loan means any loan or other
extension of credit made to one or more individuals for personal,
family, or household purposes secured by an owner-occupied 1-4
family residential dwelling, including a cooperative unit or mobile
home.
b. National bank or Federal savings association means any
national bank, Federal savings association, Federal branch or
Federal agency of a foreign bank, and any operating subsidiary
thereof that is subject to these Guidelines.
II. Standards for Residential Mortgage Lending Practices
A. General. A national bank's or Federal savings
association's residential mortgage lending activities should
reflect standards and practices consistent with and appropriate to
the size and complexity of the bank or savings association and the
nature and scope of its lending activities.
B. Objectives. A national bank's or Federal savings
association's residential mortgage lending activities should
reflect standards and practices that:
1. Enable the national bank or Federal savings association to
effectively manage the credit, legal, compliance, reputation, and
other risks associated with the bank's or savings association's
consumer residential mortgage lending activities.
2. Effectively prevent the national bank or Federal savings
association from becoming engaged in abusive, predatory, unfair, or
deceptive practices, directly, indirectly through mortgage brokers
or other intermediaries, or through purchased loans.
III. Implementation of Residential Mortgage Lending Standards
A. Avoidance of Particular Loan Terms, Conditions, and
Features. A national bank or Federal savings association should
not become involved, directly or indirectly in residential mortgage
lending activities involving abusive, predatory, unfair or
deceptive lending practices, including, but not limited to:
1. Equity Stripping and Fee Packing. Repeat refinancings
where a borrower's equity is depleted as a result of financing
excessive fees for the loan or ancillary products.
2. Loan Flipping. Repeat refinancings under circumstances
where the relative terms of the new and refinanced loan and the
cost of the new loan do not provide a tangible economic benefit to
the borrower.
3. Refinancing of Special Mortgages. Refinancing of a
special subsidized mortgage that contains terms favorable to the
borrower with a loan that does not provide a tangible economic
benefit to the borrower relative to the refinanced loan.
4. Encouragement of Default. Encouraging a borrower to
breach a contract and default on an existing loan prior to and in
connection with the consummation of a loan that refinances all or
part of the existing loan.
B. Prudent Consideration of Certain Loan Terms, Conditions
and Features. Certain loan terms, conditions and features, may,
under particular circumstances, be susceptible to abusive,
predatory, unfair or deceptive practices, yet may be appropriate
and acceptable risk mitigation measures, consistent with safe and
sound lending, and benefit customers under other circumstances. A
national bank or Federal savings association should prudently
consider the circumstances, including the characteristics of a
targeted market and applicable consumer and safety and soundness
safeguards, under which the national bank or Federal savings
association will engage directly or indirectly in making
residential mortgage loans with the following loan terms,
conditions and features:
1. Financing single premium credit life, disability or
unemployment insurance.
2. Negative amortization, involving a payment schedule in which
regular periodic payments cause the principal balance to
increase.
3. Balloon payments in short-term transactions.
4. Prepayment penalties that are not limited to the early years
of the loan, particularly in subprime loans.
5. Interest rate increases upon default at a level not
commensurate with risk mitigation.
6. Call provisions permitting the national bank or Federal
savings association to accelerate payment of the loan under
circumstances other than the borrower's default under the credit
agreement or to mitigate the bank's or savings association's
exposure to loss.
7. Absence of an appropriate assessment and documentation of the
consumer's ability to repay the loan in accordance with its terms,
commensurate with the type of loan, as required by appendix A of
this part.
8. Mandatory arbitration clauses or agreements, particularly if
the eligibility of the loan for purchase in the secondary market is
thereby impaired.
9. Pricing terms that result in the loan's being subject to the
provisions of the Home Ownership and Equity Protection Act. 15
U.S.C. 1639 et seq.
10. Original principal balance of the loan in excess of
appraised value.
11. Payment schedules that consolidate more than two periodic
payments and pay them in advance from the loan proceeds.
12. Payments to home improvement contractors under a home
improvement contract from the proceeds of a residential mortgage
loan other than by an instrument payable to the consumer, jointly
to the consumer and the contractor, or through an independent third
party escrow agent.
C. Enhanced Care to Avoid Abusive Loan Terms, Conditions, and
Features in Certain Mortgages. A national bank or Federal
savings association may face heightened risks when it solicits or
offers loans to consumers who are not financially sophisticated,
have language barriers, or are elderly, or have limited or poor
credit histories, are substantially indebted, or have other
characteristics that limit their credit choices. In connection with
such consumers, a national bank or Federal savings association
should exercise enhanced care if it employs the residential
mortgage loan terms, conditions, and features described in
paragraph B of this section III, and should also apply appropriate
heightened internal controls and monitoring to any line of business
that does so.
D. Avoidance of Consumer Misunderstanding. A national
bank's or Federal savings association's residential mortgage
lending activities should include provision of timely, sufficient,
and accurate information to a consumer concerning the terms and
costs, risks, and benefits of the loan. Consumers should be
provided with information sufficient to draw their attention to
these key terms.
E. Purchased and Brokered Loans. With respect to consumer
residential mortgage loans that the national bank or Federal
savings association purchases, or makes through a mortgage broker
or other intermediary, the national bank or Federal savings
association's residential mortgage lending activities should
reflect standards and practices consistent with those applied by
the bank or savings association in its direct lending activities
and include appropriate measures to mitigate risks, such as the
following:
1. Criteria for entering into and continuing relationships with
intermediaries and originators, including due diligence
requirements.
2. Underwriting and appraisal requirements.
3. Standards related to total loan compensation and total
compensation of intermediaries, including maximum rates, points,
and other charges, and the use of overages and yield-spread
premiums, structured to avoid providing an incentive to originate
loans with predatory or abusive characteristics.
4. Requirements for agreements with intermediaries and
originators, including with respect to risks identified in the due
diligence process, compliance with appropriate national bank or
Federal savings association policies, procedures and practices and
with applicable law (including remedies for failure to comply),
protection of the national bank or Federal savings association
against risk, and termination procedures.
5. Loan documentation procedures, management information
systems, quality control reviews, and other methods through which
the national bank or Federal savings association will verify
compliance with agreements, bank or savings association policies,
and applicable laws, and otherwise retain appropriate oversight of
mortgage origination functions, including loan sourcing,
underwriting, and loan closings.
6. Criteria and procedures for the national bank or Federal
savings association to take appropriate corrective action,
including modification of loan terms and termination of the
relationship with the intermediary or originator in question.
F. Monitoring and Corrective Action. A national bank's or
Federal savings association's consumer residential mortgage lending
activities should include appropriate monitoring of compliance with
applicable law and the bank's or savings association's lending
standards and practices, periodic monitoring and evaluation of the
nature, quantity and resolution of customer complaints, and
appropriate evaluation of the effectiveness of the bank's or
savings association's standards and practices in accomplishing the
objectives set forth in these Guidelines. The bank's or savings
association's activities also should include appropriate steps for
taking corrective action in response to failures to comply with
applicable law and the bank's or savings association's lending
standards, and for making adjustments to the bank's or savings
association's activities as may be appropriate to enhance their
effectiveness or to reflect changes in business practices, market
conditions, or the bank's or savings association's lines of
business, residential mortgage loan programs, or customer base.
[70 FR 6332, Feb. 7, 2005, as amended at 79 FR 54544, Sept. 11,
2014]