OCC guidance on higher-LTV mortgage lending emphasizes core lending principles, rescinds 2017 bulletin

Guidance on risk management for banks interested in making higher-loan-to-value (higher-LTV) loans in communities targeted for revitalization by a federal, state, or municipal governmental entity was issued Wednesday, and a 2017 guidance was rescinded, by the Office of the Comptroller of the Currency (OCC).

The guidance, issued in Bulletin 2019-28 – and rescinding Bulletin 2017-28 issued under then-Acting Comptroller Keith Noreika – provides core lending principles banks should follow when making higher-LTV loans and encourages banks looking at such lending to discuss their plans with their OCC supervisory office before they implement them, “particularly if the offerings constitute substantial deviations from the bank’s strategic or business plans.”

The bulletin notes the difficulties being experienced by creditworthy borrowers seeking to obtain loans in areas where depressed home values have persisted since the 2008 financial crisis. “The value of collateral can present challenges to banks approving home loans, in part because of supervisory loan-to-value (SLTV) limits, which generally provide that owner-occupied residential loans with LTVs above 90% should have appropriate credit enhancement (for example, mortgage insurance or readily marketable collateral),” it states.

The guidance notes particularly the challenges faced by potential buyers of distressed properties who are having a hard time getting enough financing to cover their purchase price as well as “any substantial renovation costs required to make the properties habitable.”

Bulletin 2019-28 reiterates interagency guidance that says banks should establish internal LTV limits that are consistent with the supervisory guidelines. “Existing regulations and guidelines recognize that it may be appropriate in individual cases for banks to make loans in excess of SLTV limits, based on support provided by other credit factors and subject to certain conditions,” it states. “Existing regulations and guidelines also recognize that banks may provide for 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 core lending principles outlined in Bulletin 2019-28 are:

  • 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.

Additonally, the bulletin describes what the agency considers to be sound policies and processes associated with high-LTV lending, including compliance “with the ability-to-repay standard of Regulation Z and other applicable laws and regulations,” as provided in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

OCC Bulletin 2019-18

Higher-Loan-to-Value Lending Guidance Designed to Spur Community Revitalization (announcement of 2017 guidance)