Predatory Lending under Regulatory Scrutiny
by Mary Beth Guard, BOL Guru
If your institution is involved with brokered or purchased loans, you will want to read OCC Advisory Letter 2003-3, which reminds banks of the need to:
exercise appropriate diligence when they make or purchase loans that are originated through mortgage brokers or other intermediaries; and
have in place procedures and standards adequate to ensure that their broker arrangements and loan purchases do not present unwarranted risks.
The 10-page advisory letter recommends taking affirmative steps to address the risks of these
transactions through such things as:
appropriate due diligence,
mortgage broker agreements, and
ongoing monitoring of their third-party relationships.
The guidance contains a detailed discussion of the risks, along with examples, as well as specific recommendations for accomplishing each of these objectives.
For example, as appropriate, bank policies should address specific matters such as:
maximum points and other charges imposed on brokered and purchased loans;
the use of overages and yield spread premiums;
total compensation to the broker and lender;
limits on broker compensation;
whether the interest rates and other terms for brokered and purchased loans reasonably reflect the costs and risks of making those types of loans.
Frequent, sequential refinancings;
Refinancings of special subsidized mortgages that contain terms favorable to the borrower;
Single-premium credit life insurance or similar products;
Negative amortization;
Balloon payments in short-term transactions;
Prepayment penalties that are not limited to the early years of a loan;
Financing points, fees, penalties, and other charges;
Interest rate increases upon default;
Mandatory arbitration clauses;
Acquisition of loans subject to HOEPA;
the need for strong and appropriate controls over all mortgage origination functions;
clear standards relating to the degree of the bank's involvement in the underwriting decision.
The bank should perform thorough due diligence, including background checks, before entering into relationships with mortgage brokers or third-party originators. Agreements with third-party brokers and originators should be in writing and should specifically and clearly address the rights and responsibilities of each party and address risks identified in the due diligence process.
The brokers and originators should have policies and procedures in place which are sufficient to ensure that loans to be originated or purchased by the bank will comply with applicable laws and the bank's policies.
Technology also plays a role. The bank needs to have an effective management information systems to monitor the performance of brokers and originators from whom they acquire loans.
The original version appeared in the January/February 2003 edition of the Oklahoma Bankers Association Compliance Informer.
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