OCC Guidelines Establishing Standards for Residential Mortgage Lending Practices: an official-source record from 2005

Historical context and authority

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. Source

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. Source

Scope of the federal rule

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. Source

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. Source

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. Source

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. Source

A number of commenters on these amendments lauded the content of the Advisory Letters but questioned their enforceability. Source

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. Source

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. Source

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. Source

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. Source

The enforcement remedies prescribed by Section 39 are implemented in procedural rules contained in part 30 of the OCC's rules. Source

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. Source

The Guidelines are enforceable, pursuant to Section 39 of the FDIA and part 30 of our rules, as we have described. Source

First, the bank must be able effectively to manage the various risks-- including credit, legal, compliance, and reputation risks--associated with those activities. Source

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. Source

Section 30.1(a) is amended by removing ``appendices A and B'' and adding in its place ``appendices A, B, and C''. Source

Treasury offset procedures

05-02] RIN 1557-AC93 OCC Guidelines Establishing Standards for Residential Mortgage Lending Practices AGENCY: Office of the Comptroller of the Currency, Treasury. Source

Agencies: Treasury Department, Comptroller of the Currency. Source

Federal Register, Volume 70 Issue 24 (Monday, February 7, 2005) [Federal Register Volume 70, Number 24 (Monday, February 7, 2005)] [Rules and Regulations] [Pages 6329-6334] From the Federal Register Online via the Government Publishing Office [ www.gpo.gov ] [FR Doc No: 05-2211] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 30 [Docket No. Source

Notice and collection administration

The Administrative Procedure Act \10\ (APA) requirements for notice and opportunity for comment do not apply to the Guidelines. Source

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. Source

Alternatively, the OCC may issue an order without providing the bank with a Notice of Intent. Source

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. Source

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. Source

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. Source

As noted earlier, the OCC has determined that a notice of proposed rulemaking was not required for these Guidelines. Source

Interest, penalties, and charges

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. Source

Interest rate increases upon default at a level not commensurate with risk mitigation. Source

Government obligations and implementation

1952; the Fair Debt Collection Practices Act, 15 U.S.C. Source

Department of Justice, Attorney General's Manual on the Administrative Procedure Act, at 30 n.3 (1947). Source

The Guidelines describe particular practices inconsistent with sound residential mortgage lending practices. Source

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. Source

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. Source

The Guidelines focus on the substance of activities and practices, not on the creation of policies. Source

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. Source

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. Source

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. Source

The Guidelines incorporate and implement the principles of, but do not replace, the February, 2003 advisory letters. Source

The advisories remain in effect as supervisory guidance that provides supplemental context and explanation of the issues addressed in these Guidelines. Source

The Guidelines are enforceable pursuant to the process provided in Section 39 of the Federal Deposit Insurance Act (FDIA) and part 30. Source

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. Source

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. Source

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. Source

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. Source

When the OCC issues an order, a bank is deemed to be in non-compliance with part 30. Source

Description of the OCC's Residential Mortgage Lending Practices Guidelines The Guidelines consist of three parts. Source

Part I provides an introduction to the Guidelines and explains their scope and application. Source

Part II sets forth general standards for residential mortgage lending practices. Source

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. Source

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. Source

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. Source

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. Source

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. Source

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. Source

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. Source

These objectives reflect expectations that are fundamental to sound banking practices. Source

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. Source

Part III: Implementation of Residential Mortgage Lending Practices Part III describes standards for the implementation of the objectives described in Part II. Source

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. Source

The features of these practices are widely recognized as abusive and were addressed by the OCC in our February, 2003 advisory letters. Source

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. Source

Part III cautions banks to exercise care when they offer loans containing these terms, conditions, and features, particularly in connection with subprime lending. Source

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. Source

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. Source

In addition, banks should apply heightened internal controls and monitoring with regard to this type of lending. Source

Fourth, banks should provide timely, sufficient, and accurate information to consumers concerning the terms and the relative costs, risks, and benefits of the loan. Source

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. Source

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. Source

Finally, Part III makes clear that a bank's responsibilities for maintaining appropriate consumer residential mortgage lending practices are ongoing. Source

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. Source

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. Source

Executive Order 12866 The OCC has determined that the Guidelines are not a significant regulatory action under Executive Order 12866. Source

Accordingly, the OCC concludes that the UMA does not require an unfunded mandates analysis of the Guidelines. Source

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. Source

Accordingly, the OCC has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered. Source

List of Subjects in 12 CFR Part 30 Banks, banking, Consumer protection, National banks, Privacy, Reporting and recordkeeping requirements. Source

Definitions and regulatory provisions