High-LTV Guidance Issued for Banks

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MORTGAGE EXPERT
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The nation’s primary regulator of national banks has clarified lending practices for financial institutions that make residential loans with high loan-to-value ratios in struggling areas.

In some distressed communities, there is concern that depressed housing values are inhibiting mortgage lending and limiting the speed of recovery.

But banks are in a position to support revitalization in communities targeted by governmental entities by offering high-LTV products on owner-occupied single-family properties.

Such loans can be used to finance one-to-four unit home purchases or rehabilitate the properties.

So the Office of the Comptroller of the Currency has issued guidance for national banks and federal savings associations to interpret existing regulations. The guidance sets out principles for managing risks on loans with LTV ratios in excess of 100 percent.

The guidance was discussed in OCC Bulletin 2017-28 issued on Monday.

“The rehabilitation of abandoned or distressed housing stock is an important component of broader efforts to strengthen communities,” the bulletin stated. “Local governments, government-affiliated entities, community-based organizations, financial institutions (including banks) and others have developed creative solutions for some of these challenges.”

According to the regulator, the aggregate amount of loans that exceed supervisory LTV limits should not exceed the bank’s total capital.

Banks’ boards of directors should establish standards for reviewing and approving exception loans. Written justification setting forth relevant credit factors should accompany all approvals of exception loans.

Borrowers should have the
capacity to adequately service the debt. They should also be creditworthy and have an adequate level of funds invested in the property.

Loan amounts on high-LTV transactions shouldn’t exceed $200,000, the regulator said.

“The bank should notify the appropriate OCC supervisory office in writing at least 30 days before the bank intends to begin originating program loans or to make any substantive change to a previously submitted program,” the bulletin stated. “Substantive changes may include the addition of a new eligible community, an increase in the financial commitment or duration of a program, or material changes to program loan characteristics or underwriting standards.”

The OCC said it
will evaluate the extent to which financial institutions’ programs are collectively contributing to community revitalization efforts at least annually.

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