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Mortgage Lending Compliance

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RE Loan Growth Rates All FICUs. First Mortgage Loans to Total Assets All FICUs ... Identifying Current Exposure. Measuring Interest Rate Risk. Reasonable ... – PowerPoint PPT presentation

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Title: Mortgage Lending Compliance


1
Mortgage Lending Compliance Exam Considerations
Matthew Biliouris, Program Officer Division of
Supervision National Credit Union Administration
2
Overview
  • Mortgage Lending Trends
  • Risks
  • Appraisal Considerations
  • Flood Hazard Insurance
  • Loan Participations
  • MBLs
  • 3rd Party Due Diligence
  • Industry Evolution
  • Question Answer Session

3
Mortgage Lending Trends
4
FICU Share of U.S. Mortgage Originations
5
Residential RE to Total Assets All FICUs
(compared to all banks)
6
Residential RE Growth Rate All FICUs (compared
to all banks)
7
Real Estate Comparison FICUs and All FDIC
Institutions
8
Loans All FICUs
December 31, 2007
9
RE Loan Growth RatesAll FICUs
10
First Mortgage Loans to Total Assets All FICUs
11
First Mortgage Loans / Net Worth (All FICUs)
12
Fixed Rate First Mortgages
Percentage of FICUs with Fixed Rate First
Mortgage Loans Greater than 25 Percent of Assets
13
ALLL to Loans
14
Delinquency Charge-Offs
15
Delinquency by Type
16
Concerns About Real Estate Loans
of residential mortgage debt, Source Moodys
Economy.com
Delinquencies (L)
Losses (R)
17
Increasing Credit Risk with Real Estate Loans
18
Real Estate Delinquency Type
19
Interest Rate Risk
20
Interest Rate Risk Defined
  • Interest Rate Risk Risk that changes in market
    rates will negatively impact the income statement
    and balance sheet

21
Historical Mortgage Rates
1972 2007 (Freddie Mac)
22
Interest 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

23
Adjustable Rate Mortgages
24
Adjustable Rate Mortgages
  • Regulation Z Requirements
  • Information about Interest Rates
  • Index Values
  • Effects of Adjustments
  • Payment Due after Adjustments

25
Adjustable 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

26
Liquidity Risk
27
Liquidity Risk Defined
  • Liquidity Risk Risk of an inability to Fund
    Obligations as they Come Due

28
Loan Share Growth
29
Liquidity
30
Liquidity
31
Liquidity Trends
Unused Commitments 2001 June 2007
32
Liquidity Risk
  • Identify Main Sources of Liquidity
  • Impact of Investments
  • Establish Alternative Sources
  • Updating Marketing Plans
  • Establish Loan Participation Agreements
  • Liquidity Forecast Models

33
Credit Risk
34
Credit Risk Defined
  • Credit Risk Risk of Default on Expected
    Repayments of Loans or Investments

35
Credit Risk Considerations
  • Strategic Fit
  • Written Lending Policies
  • Types of Loans Offered
  • Loan Limits (By Type)
  • Loan Limits (Aggregate)
  • Debt Ratios
  • Trade Area
  • Maximum LTV

36
Credit Risk Considerations
  • Pricing Policy
  • Quality Control Policies
  • Monitoring Policies
  • Secondary Market
  • Staffing
  • Documentation
  • Hazard Insurance

37
Credit Risk Considerations
  • Title Search
  • Title Insurance
  • Credit Report
  • Appraisals

38
Non-Traditional / Subprime Lending Guidance
39
Real 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

40
More 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

41
What are Nontraditional Mortgage Products?
  • AKA Exotic or Alternative
  • Interest Only or Payment Option
  • Allows Deferral of Principle or Interest
    (Non-fully Amortizing)

42
Understanding Nontraditional Risks
  • Payment Shock
  • Negative Amortization
  • Collateral Devaluation
  • Risk Layering
  • Reputation

43
Mitigating Nontraditional Risks
  • Capacity to Repay
  • Collateral In-Dependent
  • Loan to Value Requirements
  • Mitigating Factors
  • Full Disclosure

44
What 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

45
Which are the Troublesome Subprime Loans?
  • Underwritten to Teaser Rates
  • Low Doc/No Doc
  • Limited Payment or Rate Caps
  • Prepayment Penalties
  • Inadequate Information

46
Subprime 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

47
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48
FFIEC- 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

49
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50
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51
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52
FFIEC- 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

53
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54
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55
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56
Nontraditional Subprime Mortgage Underwriting
Terms
  • Initial Interest Rate Period
  • Payment Recast
  • Caps (LTV, Interest Rate, Payment)
  • Teaser Rate
  • Fully Indexed Rate
  • Fully Amortizing
  • PITI

57
Appraisal Considerations
58
Appraisal Considerations
  • Part 722 of RRs
  • Definitions
  • Requirements
  • Minimum Standards
  • Independence

59
Flood Hazard Insurance
60
Flood Hazard Insurance
  • History Part 760 of RRs
  • Requirements
  • Flood Hazard Determination
  • Fees Charges
  • Notice to Borrowers
  • Purchase Requirements
  • Escrowing Premiums
  • Forced Placement of Insurance

61
Loan Participations
62
Loan Participations
  • What is a loan participation?
  • Why sell participations?
  • Why buy participations?

63
Participations Purchased vs. Sold
64
Participation LoansDelinquency and Charge-off
Trend
65
Mitigating Participation Loan Risks
  • The risk might not fit your credit union.
  • You might not understand the risks.
  • The participant has limited control.

66
Successful Programs
  • Adequate due diligence
  • Ongoing risk monitoring
  • Limit concentration risk

67
Member Business Loans
68
Member Business Loans
  • NCUA Board encourages MBLs
  • Attractive yields
  • Serving a broader membership base

69
MBL Trends
Member Business Loan Activity All
FICUs 2001-June 2007
70
MBL Trends
Member Business Loan Activity by Asset Range
71
MBL Trends
Member Business Loans Outstanding by Asset
Range 2005-June 2007
72
MBL and MBL Delinquency
73
MBL Delinquency Charge Offs
74
2 Year Comparison - FICUs
75
Safety Soundness
  • Due diligence
  • Controlled growth
  • Adequate resources
  • Strong internal controls

76
Other MBL Concerns
  • Inadequate cash flow analysis
  • Incomplete loan write-ups
  • Lack of understanding business risk
  • Lack of understanding concentration risk

77
Evaluating Third Party Relationships
78
Discussion Items
  • Letter to Credit Unions 07-CU-13, Supervisory
    Letter 07-01
  • Elements of An Effective Program

79
Vendor Relationships
  • CUs Use Vendors For
  • Lending Services
  • BSA and OFAC
  • Data Processing/Web Based Services

80
Benefits/Risks
  • Benefits
  • Expand Products
  • Cost Effective
  • Risks
  • Inadequately Managed/Controlled
  • Outsourcing Relationship

81
First Element of an Effective Program
  • Risk Assessment and Planning
  • Expectations for Outsourced Functions
  • Criticality of Relationship
  • Cost-Benefit Relationship
  • Exit Strategy

82
Second Element of an Effective Program
  • Due Diligence Consideration
  • Background Checks
  • Business Model/Cash Flows
  • Financial Condition
  • Contract and Legal

83
Third 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

84
Summary
  • Outsourcing Increases Risk
  • Officials Responsible for Oversight
  • Elements of Effective Program

85
Industry Evolution
86
11 Year Comparison - FICUs
87
11 Year Comparison - FICUs
88
11 Year Comparison - FICUs
89
Loan Distribution 11 Year Comparison
90
Share Distribution 11 Year Comparison
91
Credit Card Use Increasing?
92
Questions??
Contact Information Matthew Biliouris 703-518-639
4 matthewb_at_ncua.gov
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