On June 19, 2019, the Office of the Comptroller of the Currency (OCC) issued OCC Bulletin 2019-28 Risk Management Guidance for Higher-Loan-to-Value Lending Activities in Communities Targeted for Revitalization (the 2019 Bulletin) and rescinded its prior bulletin of the same title, OCC Bulletin 2017-28 (issued August 21, 2017) (the 2017 Bulletin). The purpose of the guidance is to provide core lending principles, including open dialogues with the OCC supervisory office, for OCC-supervised banks interested in making higher-to-loan-value loans in communities targeted for revitalization by a federal, state or other municipal government entity or agency. In particular, the OCC continues to support efforts targeted in those U.S. communities still suffering from depressed home values since the 2008 financial crisis.
Lending activities in communities with depressed home values can pose significant challenges, particularly when loans on such properties have a higher loan- to-value (LTV) ratio. A “higher- loan-to-value” loan is, generally, a residential mortgage lending product for the purchase, refinancing, or rehabilitation of owner-occupied one to four family properties, where the LTV ratio at the time of origination exceeds 90 percent, and the loan is without mortgage insurance, readily marketable collateral, or other acceptable collateral (higher-LTV loans). Home values are impacted by distressed sales, short sales, foreclosures and finding comparable sales. As a result, creditworthy borrowers struggle when trying to obtain adequate home loans and/or to cover substantial renovation costs to make the home habitable in those communities. Community groups, financial institutions, and federal and state agencies often collaborate to develop and implement financing solutions to bring much needed lending to such distressed areas with revitalization efforts.
The OCC further defined “revitalization” as assistance to distressed communities targeted for revitalization, stabilization, or redevelopment (collectively, revitalization). The OCC understands that OCC-supervised banks have engaged in responsible, innovative lending strategies that are different from the 2017 Bulletin’s specific program parameters yet consistent with its goals. As such, the OCC has issued the 2019 Bulletin to continue to support the revitalization efforts of national banks, federal savings associations, and federal branches and agencies (collectively, banks) through responsible residential mortgage lending intended to meet the credit needs of individual borrowers.
As part of long-term community revitalization, the OCC believes that banks can offer higher-LTV loans in such communities for one to four family owner occupied residential properties consistent with safe and sound lending practices. The OCC set forth following core principles forhigher-LTV loans:
• Higher-LTV loans should be consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations, including those pertaining to fair lending and prohibitions on unfair, deceptive, or abusive acts or practices;
- Higher-LTV loans and their performance should be effectively monitored, tracked, and managed, including associated credit, operational, compliance, and reputation risks.
- Higher-LTV loans should be underwritten based on sound policies and processes, including guidelines governing the amounts borrowed and the capacity of borrowers to adequately service the debt, and should be consistent with the Interagency Guidelines for Real Estate Lending.
- Higher-LTV loans should be underwritten consistent with the bank’s standards for the review and approval of exception loans.
The OCC further outlined typical sound policies and processes specific to higher-LTV loans in communities targeted for revitalization to include the following:
- Underwriting standards and eligibility criteria consistent with safe and sound banking practices.
- Standards for reviewing and approving higher-LTV loans.
- Portfolio limits for the aggregate amount of higher-LTV loans.
- Loan amounts and repayment terms that:
- Align with prudent eligibility and underwriting criteria.
- Promote fair and non-discriminatory treatment of customers.
- Comply with the ability to repay standard of Regulation Z and other applicable laws and regulations.
- Appropriate risk management of higher-LTV loans and loan portfolios, including oversight by management and the board.
- Marketing and consumer disclosures that:
- Comply with applicable consumer protection laws and regulations, including fair lending laws and regulations.
- Provide information in a transparent, accurate, and customer-friendly manner.
- Generally describe the potential financial impacts on a consumer, as well as the marketability of a property securing a higher-LTV loan where the value of the property is and could remain less than the loan amount.
Under the Interagency Guidelines for Real Estate Lending, banks should establish internal LTV limits that are consistent with the supervisory guidelines, including exceptions to supervisory-LTV limits (SLTV). Existing regulations and guidelines recognize that it may be appropriate in individual cases for banks to make loans in excess of SLTV limits when support is provided by other credit factors, prudently underwritten exceptions for creditworthy borrowers whose needs do not fit within the banks’ general lending policies, including LTV limits, on a loan-by-loan basis and under certain conditions. The OCC encourages banks to desiring to participate in applicable revitalization efforts to discuss any plans to offer higher-LTV loans with their OCC Supervisory Office before implementation, particularly if the offerings constitute substantial deviations from the bank’s existing strategic or business plans.
By participating in such revitalization efforts while meeting the needs of individual borrowers in such communities, banks may receive Community Reinvestment Act (CRA) consideration depending on the specifics of their activities. The 2019 Bulletin applies to all OCC-supervised banks. It may be found athttps://www.occ.gov/news- issuances/bulletins/2019/bulletin-2019-28.html.
1Responsible innovation is the use ofnew or improved financial products,services, and processes to meet the evolving needs of consumers, busi- nesses, and communities in a man- ner that is consistent with sound risk management and is aligned with the bank’s overall business strategy.