Title: Mortgage Lending Compliance
1Mortgage Lending Compliance Exam Considerations
Matthew Biliouris, Program Officer Division of
Supervision National Credit Union Administration
2Overview
- Mortgage Lending Trends
- Risks
- Appraisal Considerations
- Flood Hazard Insurance
- Loan Participations
- MBLs
- 3rd Party Due Diligence
- Industry Evolution
- Question Answer Session
3Mortgage Lending Trends
4FICU Share of U.S. Mortgage Originations
5Residential RE to Total Assets All FICUs
(compared to all banks)
6Residential RE Growth Rate All FICUs (compared
to all banks)
7Real Estate Comparison FICUs and All FDIC
Institutions
8Loans All FICUs
December 31, 2007
9RE Loan Growth RatesAll FICUs
10First Mortgage Loans to Total Assets All FICUs
11First Mortgage Loans / Net Worth (All FICUs)
12Fixed Rate First Mortgages
Percentage of FICUs with Fixed Rate First
Mortgage Loans Greater than 25 Percent of Assets
13ALLL to Loans
14Delinquency Charge-Offs
15Delinquency by Type
16Concerns About Real Estate Loans
of residential mortgage debt, Source Moodys
Economy.com
Delinquencies (L)
Losses (R)
17Increasing Credit Risk with Real Estate Loans
18Real Estate Delinquency Type
19Interest Rate Risk
20Interest Rate Risk Defined
- Interest Rate Risk Risk that changes in market
rates will negatively impact the income statement
and balance sheet
21Historical Mortgage Rates
1972 2007 (Freddie Mac)
22Interest Rate Risk
- Impact of Market Changes
- Identifying Current Exposure
- Measuring Interest Rate Risk
- Reasonable Assumptions in ALM Models
- Realistic Viable Marketing Strategies
- Models to Shock Income Statement / Balance Sheet
23Adjustable Rate Mortgages
24Adjustable Rate Mortgages
- Regulation Z Requirements
- Information about Interest Rates
- Index Values
- Effects of Adjustments
- Payment Due after Adjustments
25Adjustable Rate Mortgages
- Common Regulation Z Errors/Issues
- Wrong Index
- Wrong Date for Index Adjustment
- Inaccurate Rounding Method
- Incorrect Application of Adjustment Caps
- Incorrect Payments
- Index
- Principal BalanceDP Errors
26Liquidity Risk
27Liquidity Risk Defined
- Liquidity Risk Risk of an inability to Fund
Obligations as they Come Due
28Loan Share Growth
29Liquidity
30Liquidity
31Liquidity Trends
Unused Commitments 2001 June 2007
32Liquidity Risk
- Identify Main Sources of Liquidity
- Impact of Investments
- Establish Alternative Sources
- Updating Marketing Plans
- Establish Loan Participation Agreements
- Liquidity Forecast Models
33Credit Risk
34Credit Risk Defined
- Credit Risk Risk of Default on Expected
Repayments of Loans or Investments
35Credit Risk Considerations
- Strategic Fit
- Written Lending Policies
- Types of Loans Offered
- Loan Limits (By Type)
- Loan Limits (Aggregate)
- Debt Ratios
- Trade Area
- Maximum LTV
36Credit Risk Considerations
- Pricing Policy
- Quality Control Policies
- Monitoring Policies
- Secondary Market
- Staffing
- Documentation
- Hazard Insurance
37Credit Risk Considerations
- Title Search
- Title Insurance
- Credit Report
- Appraisals
38Non-Traditional / Subprime Lending Guidance
39Real Estate Lending Guidance
- NCUA Letter to Credit Unions 05-CU-07
- Interagency Statement on Managing Risks with Home
Equity Lending - NCUA Letter to Credit Unions 05-CU-15
- Increasing Risks in Mortgage Lending
- NCUA Letter to Credit Unions 06-CU-16
- Nontraditional Mortgage Guidance
40More Recent Guidance
- NCUA Letter to Credit Unions 07-CU-06
- Interagency Statement on Working with Mortgage
Borrowers - NCUA Letter to Credit Unions 07-CU-07
- Final Interagency Illustrations for Consumer
Information with Nontraditional Mortgage Products - NCUA Letter to Credit Unions 07-CU-09
- Final Interagency Guidance on Subprime Mortgage
Lending
41What are Nontraditional Mortgage Products?
- AKA Exotic or Alternative
- Interest Only or Payment Option
- Allows Deferral of Principle or Interest
(Non-fully Amortizing)
42Understanding Nontraditional Risks
- Payment Shock
- Negative Amortization
- Collateral Devaluation
- Risk Layering
- Reputation
43Mitigating Nontraditional Risks
- Capacity to Repay
- Collateral In-Dependent
- Loan to Value Requirements
- Mitigating Factors
- Full Disclosure
44What are Subprime Mortgage Products?
- Definition of subprime is vague
-
- Sub-prime lending is the practice of extending
credit to borrowers who have weak credit
histories (e.g., delinquent payments,
charge-offs, judgments, bankruptcies), or reduced
payment capacity (e.g., high debt ratios or low
credit scores). - Troublesome types are generally 2/28 or 3/27 ARMS
45Which are the Troublesome Subprime Loans?
- Underwritten to Teaser Rates
- Low Doc/No Doc
- Limited Payment or Rate Caps
- Prepayment Penalties
- Inadequate Information
46Subprime Risk Mitigation
- Ensure Non-Predatory Lending-
- Not Collateral Based
- No Loan Flipping
- No Unfair of Deceptive Practices
- Underwriting Standards-
- Fully Indexed, Fully Amortizing
- Have some PITI
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48FFIEC- Illustrations of Consumer Information for
Nontraditional Mortgage Products
- Issued by the FFIEC and NCUA in May 2007
- Illustration 1- Narrative on IOs and POs
- Illustration 2- Sample Payment IOs and POs
- Illustration 3- Impact of Payment Options
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52FFIEC- Proposed Illustrations of Consumer
Information for Subprime Mortgage Products
- Issued by the FFIEC August 2007
- Illustration 1- Narrative on Subprime ARMs
- Illustration 2- Sample Payment Subprime ARMs
- Expect Final Illustrations in Next Few Months
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56Nontraditional Subprime Mortgage Underwriting
Terms
- Initial Interest Rate Period
- Payment Recast
- Caps (LTV, Interest Rate, Payment)
- Teaser Rate
- Fully Indexed Rate
- Fully Amortizing
- PITI
57Appraisal Considerations
58Appraisal Considerations
- Part 722 of RRs
- Definitions
- Requirements
- Minimum Standards
- Independence
59Flood Hazard Insurance
60Flood Hazard Insurance
- History Part 760 of RRs
- Requirements
- Flood Hazard Determination
- Fees Charges
- Notice to Borrowers
- Purchase Requirements
- Escrowing Premiums
- Forced Placement of Insurance
61Loan Participations
62Loan Participations
- What is a loan participation?
- Why sell participations?
- Why buy participations?
63Participations Purchased vs. Sold
64Participation LoansDelinquency and Charge-off
Trend
65Mitigating Participation Loan Risks
- The risk might not fit your credit union.
- You might not understand the risks.
- The participant has limited control.
66Successful Programs
- Adequate due diligence
- Ongoing risk monitoring
- Limit concentration risk
67Member Business Loans
68Member Business Loans
- NCUA Board encourages MBLs
- Attractive yields
- Serving a broader membership base
69MBL Trends
Member Business Loan Activity All
FICUs 2001-June 2007
70MBL Trends
Member Business Loan Activity by Asset Range
71MBL Trends
Member Business Loans Outstanding by Asset
Range 2005-June 2007
72MBL and MBL Delinquency
73MBL Delinquency Charge Offs
742 Year Comparison - FICUs
75Safety Soundness
- Due diligence
- Controlled growth
- Adequate resources
- Strong internal controls
76Other MBL Concerns
- Inadequate cash flow analysis
- Incomplete loan write-ups
- Lack of understanding business risk
- Lack of understanding concentration risk
77Evaluating Third Party Relationships
78Discussion Items
- Letter to Credit Unions 07-CU-13, Supervisory
Letter 07-01 - Elements of An Effective Program
79Vendor Relationships
- CUs Use Vendors For
- Lending Services
- BSA and OFAC
- Data Processing/Web Based Services
80Benefits/Risks
- Benefits
- Expand Products
- Cost Effective
- Risks
- Inadequately Managed/Controlled
- Outsourcing Relationship
81First Element of an Effective Program
- Risk Assessment and Planning
- Expectations for Outsourced Functions
- Criticality of Relationship
- Cost-Benefit Relationship
- Exit Strategy
82Second Element of an Effective Program
- Due Diligence Consideration
- Background Checks
- Business Model/Cash Flows
- Financial Condition
- Contract and Legal
83Third Element of an Effective Program
- Measuring, Monitoring, Controlling Risk
- Policies and Procedures
- Internal Controls and Audit Function
- Measure Compliance with Contract
- Evaluation of the Program
84Summary
- Outsourcing Increases Risk
- Officials Responsible for Oversight
- Elements of Effective Program
85Industry Evolution
8611 Year Comparison - FICUs
8711 Year Comparison - FICUs
8811 Year Comparison - FICUs
89Loan Distribution 11 Year Comparison
90Share Distribution 11 Year Comparison
91Credit Card Use Increasing?
92Questions??
Contact Information Matthew Biliouris 703-518-639
4 matthewb_at_ncua.gov