Prompted by a concern that risk is not backed by management, regulator reminds banks about proper ADU use

Banks originating mortgage loans using asset dissipation underwriting (ADU) should develop and implement policies, processes, and control systems for the underwriting “in a manner consistent with safe and sound banking practices set forth in existing regulations,” the regulator of national banks said in a bulletin Tuesday.

The bulletin was apparently prompted by concern by the Office of the Comptroller of the Currency (OCC) that ADU credit risk being taken on by some banks is not in line with risk management policies. “A common concern (by agency examiners) is that a banks’ practices do not sufficiently consider existing regulatory standards and guidelines for real estate and mortgage lending activities,” the bulletin states.

The OCC said ADU activities at banks should align with the institutions’ overall business plans and strategies. “Such strategies could include working with consumers who have a capacity to repay a mortgage loan even though they do not meet traditional income-based underwriting repayment standards,” the bulletin (#2019-36) states.

The agency also noted that it expects all banks under its supervision to offer mortgage loans products “in a manner that ensures that ensures fair access to financial services and fair treatment of consumers and complies with applicable laws and regulations.”

The OCC said the guidance in bulletin applies to all banks engaged in ADU.

According to the agency, ADU (which uses an applicant’s assets to calculate a hypothetical cash annuity stream, which is then added to the applicant’s other income when evaluating the applicant’s ability to make mortgage payments) is often used to underwrite mortgage loans to high-net-worth applicants who acquire and retain significant liquid assets but do not have sufficient cash flow to qualify for a mortgage under standard income attribution criteria.

Lenders originating mortgages for sale to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are permitted to use ADU to underwrite mortgage loans based on employment-related retirement assets or certain other assets of applicants who are near retirement.

While the OCC in the bulletin acknowledged that ADU has existed and been prudently administered for many years, the agency also noted that (more recently) examiners have identified “greater use of ADU that is not supported by risk management practices commensurate with ADU credit risk.”

This agency said the bulletin reminds bankers and examiners that real estate and mortgage lending activities are subject to specific regulatory standards and guidelines.

OCC Bulletin 2019-36: Lending Standards for Asset Dissipation Underwriting

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