S upplementing its earlier advisory letters that susceptible to - - PDF document

Mortgage Banking Alert

March 2005

Newly Adopted OCC Guidance For National Banks Addresses Implementation of Anti-Predatory Lending Standards

By Stuart S. Yusem, Esq.

susceptible to abuse. The OCC cautions lenders to exercise care when they offer loans containing terms in this category, particularly in connection with subprime lending or 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. The OCC expects a bank that is engaged

in lending of this kind to elevate its level of internal controls and monitoring. Additional substantive elements

• f

the Guidelines include the following standards:

Banks are urged to provide timely,

sufficient, and accurate information to consumers concerning the terms and the relative costs, risks, and benefits of the loan.

Banks are required to have risk

mitigation controls in place with respect to residential mortgage loans that a bank purchases, or makes through a mortgage broker or other intermediary. The Guidelines provide a number of examples of such measures, including criteria for entering into and continuing

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upplementing its earlier advisory letters that warned national banks of practices that it considered predatory or abusive, the Office

• f the Comptroller of the Currency (the “OCC”)

has issued its “Guidelines Establishing Standards for National Banks’ Residential Mortgage Lending Practices.” The self-proclaimed objective of the Guidelines is to ensure that national banks and their operating subsidiaries do not become directly

• r indirectly involved in predatory, abusive, unfair,
• r deceptive residential mortgage lending practices.

The Guidelines were published in the Federal Register on February 7, 2005, and take effect on April 8, 2005. The Guidelines describe residential mortgage lending practices that national banks should avoid

• r that warrant a heightened level of care. The

OCC unequivocally repudiates certain practices, such as equity stripping, fee packing, 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 OCC characterizes other loan features, such as financing single premium insurance, negative amortization and mandatory arbitration, as being

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relationships with intermediaries and

• riginators, methods through which the

bank may retain appropriate controls

• ver mortgage origination functions,

and criteria and procedures for the bank to take any necessary corrective action.

The Guidelines emphasize that a bank’s

responsibilities for maintaining controls are ongoing, for example by evaluating its handling of customer complaints, by taking corrective action in response to its failure to adhere to the requirements

• f 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, loan programs or customer base. The OCC emphasizes that the Guidelines are not intended to be implemented uniformly from lender to lender. Instead, the OCC says that a bank’s standards for residential mortgage lending should be appropriate to the bank's size and complexity and the nature and scope of its lending activities. The Guidelines were adopted pursuant to the OCC’s power to issue either regulations or guidelines in order to ensure the safety and soundness of national banks. The OCC deems fair treatment of customers and avoidance of practices that lead to credit, legal, compliance and reputation risk to be fundamental to sound banking

• practices. The Guidelines derive from two advisory

letters issued by the OCC in February 2003, alerting national banks to practices that the OCC considered predatory or abusive. The Guidelines do not replace the February 2003 advisory letters, but supply “standards” regarding lending practices that are, or may in certain contexts be, deemed to be

• predatory. As phrased by the OCC, the Guidelines

provide the “core elements” necessary to apply the February 2003 advisory letters in a “framework” that provides for enforcement on a case-by-case basis. A guideline differs from a regulation by giving the regulator more flexibility in interpretation and enforcement - the violation of a regulation requires the OCC to take specific enforcement action but for guidelines, the OCC has the discretion to pursue action appropriate to the circumstances of the offending bank. For example, when dealing with a guideline, the OCC can take into account the extent of the noncompliance and the bank’s self-corrective and remedial responses. Failure of a bank to take corrective measures could result in an

• rder against the bank analogous to a cease-and-

desist order. Some consumer advocates have been quick to criticize the Guidelines on the basis that Guidelines are not an effective substitute for strong enforcement of predatory lending activity, and also because practices that the Guidelines deem only potentially abusive, such as single premium credit life insurance, ought to be deemed abusive in all

• circumstances. It is expected the Guidelines will

not end the call for federal legislative action on the subject matter.

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This article is intended to be an introduction to the Guidelines. Any program of compliance will require reference to the complete text of the Guidelines. For more information and counseling as to what appropriate steps your company should take at this time, or for a copy of the any of the laws described here, please contact Stuart S. Yusem at 973.597.2566 or syusem@lowenstein.com.