[Federal Register: February 7, 2005 (Volume 70, Number 24)]
[Rules and Regulations]
[Page 6329-6334]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07fe05-4]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 30
[Docket No. 05-02]
RIN 1557-AC93
OCC Guidelines Establishing Standards for Residential Mortgage
Lending Practices
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Appendix to regulations; final guidelines.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
issuing, as an appendix to part 30 of its regulations, guidelines
concerning the residential mortgage lending practices of national banks
and their operating subsidiaries (Guidelines) as a further step to
protect against national bank involvement in predatory, abusive,
unfair, or deceptive residential mortgage lending practices. The
Guidelines describe particular practices inconsistent with sound
residential mortgage lending practices. They also describe other terms
and practices that may be conducive to predatory, abusive, unfair, or
deceptive lending practices, depending on the circumstances, and which,
accordingly, warrant a heightened degree of care by lenders. In
addition, the Guidelines address the steps that banks should take to
mitigate risks associated with their purchase of residential mortgage
loans and use of mortgage brokers to originate loans. The Guidelines
focus on the substance of activities and practices, not on the creation
of policies. The standards contained in the Guidelines are enforceable
pursuant to section 39 of the Federal Deposit Insurance Act and the
implementing process set forth in part 30 of the OCC's regulations.
EFFECTIVE DATE: April 8, 2005.
FOR FURTHER INFORMATION CONTACT: For questions concerning the
Guidelines, contact Michael Bylsma, Director, Community and Consumer
Law Division, (202) 874-5750, Michele Meyer, Special Counsel,
Legislative & Regulatory Activities Division, (202) 874-5090, or Rick
Freer, National Bank Examiner, Compliance, (202) 874-4428, 250 E
Street, SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Background
National banks are authorized by statute to engage in real estate
lending activities, subject to the requirements of Federal law,\1\ and
national banks' real estate lending is closely supervised and
comprehensively regulated under a regulatory framework that includes a
wide variety of Federal laws and regulations designed to ensure the
protection of consumers of banks' residential mortgage products and
services.\2\
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\1\ 12 U.S.C. 371(a); and see 12 CFR part 34 (OCC rules
governing real estate lending and appraisals implementing 12 U.S.C.
1828(o)).
\2\ Federal consumer protection laws and regulations that apply
with respect to the residential real estate lending activities of
national banks and their operating subsidiaries include: the Federal
Trade Commission Act, 15 U.S.C. 41 et seq.; the Truth in Lending
Act, 15 U.S.C. 1601 et seq.; the Home Ownership and Equity
Protection Act, 15 U.S.C. 1639 et seq.; the Fair Housing Act, 42
U.S.C. 3601 et seq.; the Equal Credit Opportunity Act, 15 U.S.C.
1691 et seq.; the Real Estate Settlement Procedures Act, 12 U.S.C.
1261 et seq.; the Flood Disaster Protection Act, 42 U.S.C. 4001 et
seq.; the Home Mortgage Disclosure Act, 12 U.S.C. 2801 et seq.; the
Fair Credit Reporting Act, 15 U.S.C. 1681 et seq., as recently
amended by the Fair and Accurate Credit Transactions Act of 2003,
Pub. L. 108-159, 111 Stat. 1952; the Fair Debt Collection Practices
Act, 15 U.S.C. 1692 et seq.; and the privacy provisions of Title V
of the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq.
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Fair treatment of customers is fundamental to sound banking
practices
[[Page 6330]]
and the OCC has taken a number of measures in recent years to assure
that the lending practices of national banks reflect that standard. In
particular, in February, 2003, we issued two advisory letters alerting
national banks to practices that may be considered predatory or abusive
and advising national banks on measures to avoid such practices. The
advisories addressed national banks' mortgage origination activity, as
well as purchases of loans and use of third-party brokers to conduct
mortgage lending.\3\ In January, 2004, we added to our rules an express
prohibition on making mortgage loans based predominantly on the bank's
realization of foreclosure or liquidation value of the collateral,
without regard to the borrower's ability to repay the loan according to
its terms, a prohibition that goes to the heart of predatory lending.
In that same rulemaking, we also added provisions prohibiting banks
from engaging in unfair or deceptive practices within the meaning of
section 5 of the Federal Trade Commission Act, 15 U.S.C. 45.\4\ In
addition to establishing standards by regulation and in guidance, our
overall approach includes taking prompt enforcement action to remedy
abusive practices if we find that they have occurred.\5\
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\3\ OCC Advisory Letter 2003-2, ``Guidelines for National Banks
to Guard Against Predatory and Abusive Lending Practices'' (Feb. 21,
2003) and OCC Advisory Letter 2003-3, ``Avoiding Predatory and
Abusive Lending Practices in Brokered and Purchased Loans'' (Feb.
21, 2003).
\4\ 69 FR at 1917 (to be codified at 12 CFR 34.3). Through
amendments to other provisions of our rules, both the anti-predatory
lending standard and the prohibition against unfair or deceptive
practices also apply to national banks' non-real estate lending. A
number of commenters on these amendments lauded the content of the
Advisory Letters but questioned their enforceability.
\5\ A listing of enforcement actions taken recently by the OCC
is available on our Web site in the ``Popular FOIA Requests''
section at http://www.occ.treas.gov/foia/foiadocs.htm.
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In order to enhance our ability to apply the guidance described in
our February, 2003 advisory letters, we are now adopting the core
elements of that guidance in the form of guidelines for residential
mortgage lending standards, in a new Appendix C to part 30 of our
regulations. These standards further the OCC's goal of ensuring that
national banks and their operating subsidiaries are not involved
directly or indirectly through loans that they purchase or make through
intermediaries, in predatory or abusive residential mortgage lending
practices. The Guidelines incorporate and implement the principles of,
but do not replace, the February, 2003 advisory letters. The advisories
remain in effect as supervisory guidance that provides supplemental
context and explanation of the issues addressed in these Guidelines.
Like the advisories, the Guidelines apply to national banks and,
pursuant to OCC regulations, to their operating subsidiaries.\6\ The
Guidelines focus on the substance of activities and practices, not on
the creation of policies. The Guidelines are enforceable pursuant to
the process provided in Section 39 of the Federal Deposit Insurance Act
(FDIA) and part 30.
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\6\ 12 CFR 5.34(e) (operating subsidiaries may conduct only
those activities permissible for the parent national bank; operating
subsidiaries' authorized activities are subject to the same terms
and conditions as apply to the parent bank).
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Enforcement of the Guidelines
The OCC is issuing these Guidelines pursuant to Section 39 of the
FDIA.\7\ Section 39 authorizes the OCC to prescribe safety and
soundness standards in the form either of a regulation or guidelines.
These standards currently include, among others, operational and
managerial standards for insured depository institutions that relate to
internal controls, information systems, and audit systems; loan
documentation; credit underwriting; interest rate exposure; and asset
growth. Section 39 also provides, without qualification, that ``each
appropriate Federal banking agency'' may prescribe ``such other
operational and managerial standards'' as it ``determines to be
appropriate.''
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\7\ 12 U.S.C. 1831p-1. Section 39 was enacted as part of the
Federal Deposit Insurance Corporation Improvement Act of 1991,
Public Law 102-242, section 132(a), 105 Stat. 2236, 2267-70 (Dec.
19, 1991) (FDICIA).
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Section 39 prescribes different consequences depending on whether
the standards it authorizes are issued by regulation or guidelines.
Pursuant to Section 39, if a national bank fails to meet a standard
prescribed by regulation, the OCC must require it to submit a plan
specifying the steps it will take to comply with the standard. If a
national bank fails to meet a standard prescribed by guideline, the OCC
has the discretion to decide whether to require the submission of such
a plan.\8\ Issuing these residential mortgage lending practices
standards by guideline rather than regulation provides the OCC with the
flexibility to pursue the course of action that is most appropriate,
taking into consideration the specific circumstances of a national
bank's noncompliance with one or more standards, and the bank's self-
corrective and remedial responses.
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\8\ See 12 U.S.C. 1831p-1(e)(1)(A)(i) and (ii). In either case,
however, the statute authorizes the issuance of an order and the
subsequent enforcement of that order in court, independent of any
other enforcement action that may be available in a particular case.
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The Guidelines incorporate key provisions of the February, 2003
advisory letters and describe certain practices the OCC believes are
inconsistent with sound residential mortgage lending practices. They
also describe other terms and practices that may be conducive to
predatory, abusive, unfair, or deceptive lending, and which,
accordingly, warrant a heightened degree of care by lenders. The
Guidelines thus incorporate the central principles and considerations
contained in the February, 2003 advisories into a framework that
specifically provides for their enforcement on a case-by-case basis
under the framework provided by Section 39 and part 30 of our
regulations.
The enforcement remedies prescribed by Section 39 are implemented
in procedural rules contained in part 30 of the OCC's rules. Under
these provisions, the OCC may initiate the part 30 process when we
determine, by examination or otherwise, that a national bank has failed
to meet the standards set forth in the Guidelines.\9\ Upon making that
determination, we may request, through a supervisory letter or in a
report of examination, that the national bank submit a compliance plan
to the OCC detailing the steps the bank will take to correct the
deficiencies and the time within which it will take those steps. This
request is termed a Notice of Deficiency. Upon receiving a Notice of
Deficiency from the OCC, the national bank must submit a compliance
plan to the OCC for approval within 30 days.
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\9\ The procedures governing the determination and notification
of failure to satisfy a standard prescribed pursuant to Section 39,
the filing and review of compliance plans, and the issuance, if
necessary, of orders appear in our regulations at 12 CFR 30.3, 30.4,
and 30.5, respectively.
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If a national bank fails to submit an acceptable compliance plan,
or fails materially to comply with a compliance plan approved by the
OCC, the OCC may issue a Notice of Intent to Issue an Order pursuant to
Section 39 (Notice of Intent). The bank then has 14 days to respond to
the Notice of Intent. After considering the bank's response, the OCC
may issue the order, decide not to issue the order, or seek additional
information from the bank before making a final decision.
Alternatively, the OCC may issue an order without providing the bank
with a Notice of Intent. In such a case, the bank may appeal after-the-
fact to the OCC and the OCC has 60 days to consider the appeal and
render a final decision. When the OCC issues an order, a bank is deemed
to be in non-compliance with part 30.
[[Page 6331]]
Orders are formal, public documents, and they may be enforced in
district court or through the assessment of civil money penalties under
12 U.S.C. 1818.
Description of the OCC's Residential Mortgage Lending Practices
Guidelines
The Guidelines consist of three parts. Part I provides an
introduction to the Guidelines and explains their scope and
application. Part II sets forth general standards for residential
mortgage lending practices. Part III describes the implementation of
those standards. We have also made technical conforming amendments to
the part 30 regulations to add references to new Appendix C, which
contains the Guidelines, where appropriate.
Part I: Introduction
Part I describes the purpose of the Guidelines, which is to protect
against involvement by national banks and their operating subsidiaries,
either directly or through loans that they purchase or make through
intermediaries, in predatory or abusive residential mortgage lending
practices that are injurious to bank customers and that expose the bank
to credit, compliance, reputation, and other risks associated with
abusive lending practices. The Guidelines apply to residential mortgage
lending by national banks, federal branches and agencies of foreign
banks, and operating subsidiaries of such entities, except for brokers,
dealers, persons providing insurance, investment companies, and
investment advisers, all of which are functionally regulated pursuant
to various provisions of law. For purposes of the Guidelines, a
residential mortgage loan is any loan or other extension of credit made
to one or more individuals for personal, family, or household purposes
and secured by an owner-occupied, 1-4 family residential dwelling,
including a cooperative unit or mobile home.
The Guidelines are enforceable, pursuant to Section 39 of the FDIA
and part 30 of our rules, as we have described. However, as set forth
in Part I, nothing in the 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. Thus, for example, a
bank's failure to comply with the standards set forth in these
Guidelines also may be actionable under section 8 of the FDIA if the
failure constitutes an unsafe or unsound practice, or under section 5
of the Federal Trade Commission Act if it is an unfair or deceptive
practice.
Part II: Standards for Residential Mortgage Lending Practices
Part II of the Guidelines describes two overarching objectives that
should inform a bank's residential mortgage lending activities. First,
the bank must be able effectively to manage the various risks--
including credit, legal, compliance, and reputation risks--associated
with those activities. Second, the bank must not become engaged in
abusive, predatory, unfair, or deceptive practices, directly,
indirectly through mortgage brokers or other intermediaries, or through
purchased loans. These objectives reflect expectations that are
fundamental to sound banking practices. Different banks may achieve
these objectives using different methods, however, and the Guidelines
expressly recognize that the practices a bank follows in its
residential mortgage lending activities need to be consistent with, and
appropriate to, its size and complexity and the nature and scope of
those activities.
Part III: Implementation of Residential Mortgage Lending Practices
Part III describes standards for the implementation of the
objectives described in Part II. It comprises six components. First,
Part III lists and briefly describes specific lending practices
inconsistent with sound residential mortgage lending practices,
including practices known as equity stripping, fee packing, and loan
flipping, refinancing of a special subsidized mortgage on terms adverse
to the consumer, and encouraging a borrower to breach a contract and
default on an existing loan in connection with a refinancing of that
loan. The features of these practices are widely recognized as abusive
and were addressed by the OCC in our February, 2003 advisory letters.
Second, Part III describes certain loan terms, conditions and
features--such as financing single premium insurance, negative
amortization and mandatory arbitration--that may, under particular
circumstances, be susceptible to abusive, predatory, unfair or
deceptive practices, yet may be acceptable and may benefit customers
under other circumstances. Part III cautions banks to exercise care
when they offer loans containing these terms, conditions, and features,
particularly in connection with subprime lending.
Third, banks that decide to offer loans with the types of features
just described should take particular account of the circumstances of
the consumers to whom the loans are offered. Banks should exercise
heightened diligence if they offer such loans to consumers who are
elderly, substantially indebted, not financially sophisticated, have
language barriers, have limited or poor credit histories, or have other
characteristics that limit their credit choices. In addition, banks
should apply heightened internal controls and monitoring with regard to
this type of lending.
Fourth, banks should provide timely, sufficient, and accurate
information to consumers concerning the terms and the relative costs,
risks, and benefits of the loan.
Fifth, with respect to consumer residential mortgage loans that a
bank purchases, or makes through a mortgage broker or other
intermediary, the bank's residential mortgage lending activities also
should include appropriate measures to mitigate risks. Part III
provides a number of examples of such measures, including criteria for
entering into and continuing relationships with intermediaries and
originators, methods through which the bank may retain appropriate
controls over mortgage origination functions, and criteria and
procedures for the bank to take appropriate corrective action if
necessary.
Finally, Part III makes clear that a bank's responsibilities for
maintaining appropriate consumer residential mortgage lending practices
are ongoing. For example, on a continuing basis, a bank should monitor
its compliance with applicable law and its internal lending standards,
and monitor and evaluate its handling of customer complaints. The
bank's activities also should include appropriate steps for taking
corrective action in response to failure to adhere to the requirements
of the law or its internal lending standards, and for making
adjustments to the bank's activities to enhance their effectiveness or
to reflect changes in business practices, market conditions, or the
bank's lines of business, residential mortgage loan programs, or
customer base.
Effective Date
These Guidelines take effect April 8, 2005. The Administrative
Procedure Act \10\ (APA) requirements for notice and opportunity for
comment do not apply to the Guidelines. The APA excepts from its notice
and comment requirements, among other types of issuances, ``general
statements of policy.'' \11\ General statements of policy
[[Page 6332]]
are ``statements issued by an agency to advise the public prospectively
of the manner in which the agency proposes to exercise a discretionary
power.'' \12\ Consistent with this definition, courts have found that
an issuance is a general statement of policy if it applies
prospectively and ``leaves the [agency] free to exercise [its] informed
discretion in the situations that arise.'' \13\
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\10\ 5 U.S.C. 551 et seq.
\11\ 5 U.S.C. 553(b)(A).
\12\ U.S. Department of Justice, Attorney General's Manual on
the Administrative Procedure Act, at 30 n.3 (1947).
\13\ Guardian Federal Savings and Loan Ass'n v. Federal Savings
and Loan Insurance Corp., 589 F.2d 658, 666-67 (D.C. Cir. 1978)
(concluding that an FSLIC bulletin that used ``directive'' language
to specify the criteria necessary for a satisfactory audit of a
savings association was nonetheless a ``general statement of
policy'' within the meaning of the APA because it preserved the
FSLIC's discretion to accept a non-conforming audit report or to
prescribe additional requirements in a particular case). See also
Chen Zhon Chai v. Carroll, 48 F.3d 1331, 1341 (4th Cir. 1995) (``A
rule is a general statement of policy if it does not establish a
binding norm and leaves agency officials free to exercise their
discretion.'')
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Although these residential mortgage lending standards build on the
standards in our 2003 Advisory Letters, their placement within the
enforcement framework established by Section 39 of the FDIA applies
prospectively only. Moreover, we are issuing the Guidelines in a form
that, by the express terms of Section 39, preserves the OCC's
discretion to require a compliance plan, and, thus, whether to initiate
the part 30 process in any particular case. For these reasons, we
conclude that the Guidelines fall within the APA exception for general
statements of policy and that notice and comment procedures are,
accordingly, not required.
Regulatory Flexibility Analysis
The Regulatory Flexibility Act (RFA) does not apply to a rule for
which an agency is not required to publish a notice of proposed
rulemaking. 5 U.S.C. 603.
Executive Order 12866
The OCC has determined that the Guidelines are not a significant
regulatory action under Executive Order 12866.
Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMA), Public Law 104-4,
applies only when an agency is required to promulgate a general notice
of proposed rulemaking or a final rule for which a general notice of
proposed rulemaking was published. 2 U.S.C. 1532. As noted earlier, the
OCC has determined that a notice of proposed rulemaking was not
required for these Guidelines. Accordingly, the OCC concludes that the
UMA does not require an unfunded mandates analysis of the Guidelines.
Moreover, the OCC believes that the Guidelines will not result in
expenditures by State, local, and tribal governments, or by the private
sector, of more than $100 million in any one year. Accordingly, the OCC
has not prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered.
List of Subjects in 12 CFR Part 30
Banks, banking, Consumer protection, National banks, Privacy,
Reporting and recordkeeping requirements.
0
For the reasons set forth in the preamble, part 30 of chapter I of
title 12 of the Code of Federal Regulations is amended as follows:
PART 30--SAFETY AND SOUNDNESS STANDARDS
0
1. The authority citation for part 30 is revised to read as follows:
Authority: 12 U.S.C. 93a, 371, 1818, 1831p, 3102(b); 15 U.S.C.
1681S, 1681W, 6801, 6805(b)(1).
Sec. 30.1 [Amended]
0
2. Section 30.1(a) is amended by removing ``appendices A and B'' and
adding in its place ``appendices A, B, and C''.
Sec. 30.2 [Amended]
0
3. In Sec. 30.2, add a final sentence to read as follows: ``The OCC
Guidelines Establishing Standards for Residential Mortgage Lending
Practices are set forth in appendix C to this part.''
Sec. 30.3 [Amended]
0
4. Section 30.3(a) is amended by removing ``and the Interagency
Guidelines Establishing Standards for Safeguarding Customer Information
set forth in appendix B to this part'' and adding in its place ``the
Interagency Guidelines Establishing Standards for Safeguarding Customer
Information set forth in appendix B to this part, or the OCC Guidelines
Establishing Standards for Residential Mortgage Lending Practices set
forth in appendix C to this part''.
0
5. A new Appendix C is added to part 30 to read as follows:
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 and their
operating subsidiaries, either directly or through loans that they
purchase or make through intermediaries, in predatory or abusive
residential mortgage lending practices that are injurious to bank
customers and that expose the bank 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 and their operating subsidiaries
must comply with the requirements and Guidelines affecting appraisals
of
[[Page 6333]]
residential mortgage loans and appraiser independence. 12 CFR part 34,
subpart C, and the Interagency Appraisal and Evaluation Guidelines (OCC
Advisory Letter 2003-9 (October 28, 2003)). 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 bank 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 to
perform due diligence and exercise appropriate control with regard to
trustee activities. See 12 CFR 9.6 (a) and Comptroller's Handbook on
Asset Management. For example, national banks 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 branches and 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 bank 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
Lending Rules, 12 CFR 34.3, 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. Bank means any national bank, federal branch or 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 bank's residential mortgage lending activities should
reflect standards and practices consistent with and appropriate to the
size and complexity of the bank and the nature and scope of its lending
activities.
B. Objectives. A bank's residential mortgage lending activities
should reflect standards and practices that:
1. Enable the bank to effectively manage the credit, legal,
compliance, reputation, and other risks associated with the bank's
consumer residential mortgage lending activities.
2. Effectively prevent the bank 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
bank 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 bank should prudently
consider the circumstances, including the characteristics of a targeted
market and applicable consumer and safety and soundness safeguards,
under which the bank 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 bank to accelerate payment of the
loan under circumstances other than the borrower's default under the
credit agreement or to mitigate the bank's exposure to loss.
[[Page 6334]]
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 bank 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 bank 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 bank'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 bank purchases, or makes through a
mortgage broker or other intermediary, the bank's residential mortgage
lending activities should reflect standards and practices consistent
with those applied by the bank 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 bank policies, procedures and
practices and with applicable law (including remedies for failure to
comply), protection of the bank against risk, and termination
procedures.
5. Loan documentation procedures, management information systems,
quality control reviews, and other methods through which the bank will
verify compliance with agreements, bank 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 bank 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 bank's consumer residential
mortgage lending activities should include appropriate monitoring of
compliance with applicable law and the bank'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 standards and practices in
accomplishing the objectives set forth in these Guidelines. The bank's
activities also should include appropriate steps for taking corrective
action in response to failures to comply with applicable law and the
bank's lending standards, and for making adjustments to the bank's
activities as may be appropriate to enhance their effectiveness or to
reflect changes in business practices, market conditions, or the bank's
lines of business, residential mortgage loan programs, or customer
base.
Dated: January 31, 2005.
Julie L. Williams,
Acting Comptroller of the Currency.
[FR Doc. 05-2211 Filed 2-4-05; 8:45 am]
BILLING CODE 4810-33-P