Joint Trades Comments on OCC HLTV Proposal

February 22, 2016


Office of the Comptroller of the Currency

Legislative and Regulatory Activities Division

Attn: 1557-NEW

400 7th Street SW

Suite 3E-218; Mail Stop 9W-11

Washington, DC 20219

Dear sir or madam:

The American Bankers Association (ABA)[1], Consumer Bankers Association (CBA)[2] and National Association of Affordable Housing Lenders (NAAHL)[3] (collectively, the Associations) are pleased to provide these comments to the Office of the Comptroller of the Currency (OCC) on the Agency Information Collection Activities; Proposed Information Collection; Comment Request; Draft Bulletin; Risk Management Guidance for Higher Loan-to-Value Lending in Communities Targeted for Revitalization.  The purpose of the request for comment is to fulfill the Paperwork Reduction Act (PRA) requirements pursuant to the Draft Bulletin: Risk Management Guidance for Higher Loan-to-Value Lending in Communities Targeted for Revitalization” (“Draft Bulletin”). 

In general, the Associations support the OCC’s efforts to provide guidance for its banks in managing risks for certain higher LTV lending in communities targeted for revitalization. Our members appreciate the support of the OCC as they participate in responsible homeownership and revitalization efforts of distressed communities by offering their own loan products. We provide a few specific comments that should facilitate responsible HLTV home mortgage lending without undue burden on banks.





Under the Draft Bulletin, national banks and federal savings banks wishing to establish a program for originating owner-occupied residential mortgage loans that exceed supervisory loan-to-value (SLTV) limits in communities targeted for revitalization should have policies and procedures approved by their board of directors addressing loan portfolio management, underwriting, and other relevant considerations.  The banks must also notify the OCC in writing at least 30 days prior to originating or changing such a program and provide a copy of the board-approved policies and procedures.  The Draft Bulletin sets forth the characteristics of an eligible loan, and eligible community, and the provisions that must be contained in board-approved policies and procedures.

The provisions of board-approved policies and procedures must include, among other things, the content form and timing of notices the bank will provide to borrowers of eligible loans, informing the borrower:

  • The market value of a rehabilitated property likely will be less than the original loan amount upon completion of the rehabilitation;
  • The market value may continue to be less than the original loan amount for the duration of the loan;
  • An explanation of the financial implications if the borrower seeks to sell the property after rehabilitation and the sales price is less than the loan balance.

Provisions of the board-approved policies and procedures must also include, among other things, the defined geography of an eligible community; the amount and duration of the bank’s financial commitment to the program; limitation on the aggregate level of committed eligible loans as a percentage of tier 1 capital, not to exceed 10 percent; characteristic of eligible loans, including maximum loan size not to exceed $200,000; underwriting standards and approval processes; real estate appraisal and evaluation criteria; credit administration requirements; compliance with all applicable laws, including anti-discrimination and section 5 of the FTC Act; incentives that may be available to qualifying borrowers; and monitoring and internal reporting requirements.

In addition:

  • The proposal calls for formal written policies and procedures to be established by the bank, with acceptable terms and underwriting standards. 
  • The proposal requires notices to inform the borrower of the particular risks associated with an HLTV loan.  Thus, the borrower will be warned of the risks prior to entering into the loan agreement.
  • Formal review and approval by the board is required. The proposal further describes the policies and procedures the banks must have in place.
  • At least 30-days prior to making any loan under a program or making any substantive change to a program, the bank must submit the program to the OCC for review. The OCC will evaluate the bank’s program to assess whether it complies with the requirements of applicable laws and regulations and is consistent with safe and sound lending practices, the Bulletin, and other relevant guidance. In so doing, the OCC may request clarification or changes to the bank’s policies and procedures before any loan may be originated under the program or any changes may be made in the program. During subsequent supervisory activities, examiners will also monitor and evaluate the program, for compliance with specific set of governance and controls, and may review individual loans for asset quality, credit risk, and compliance.
  • OCC will annually review the proposed guidelines, to evaluate the overall impact of banks’ programs in communities targeted for revitalization, considering among other things, whether the programs adequately control the various risks, the performance of the loans, and the effect the lending has on the housing market and other economic indicators in the targeted communities. Based on the result of these evaluations, the OCC may amend or rescind the Bulletin; though doing so would not retroactively render any loans made consistent with the Bulletin unsafe or unsound.

The Draft Bulletin also sets out the terms for OCC supervision of bank programs, at the time of receiving the bank notice of a new or revised program, and at least annually thereafter. During the annual evaluations, the OCC will determine the overall impact of banks’ programs in targeted communities, and will consider, among other things, whether the programs adequately control the various risks, the performance of the loans, and the effect the lending has on the housing market and the economies of the communities.  If, based on these evaluations, the OCC amends or rescinds the Bulletin, the action will be prospective, and will apply only to the origination of new loans that exceed the SLTV limits.

The OCC estimates 20 banks and savings institutions will take advantage of this program. The burden for each is estimated to be 200 hours for drafting policies; 40 hours for documentation; and 10 hours for reporting.  Therefore, the total estimate annual burden is 5,000 hours.


Associations Comments

The Associations’ members are committed to supporting efforts to revitalize neighborhoods that are distressed and in need of mortgage and home equity lending for home purchase, home improvement, and rehabilitation of properties.  Many low and middle income geographies in the country have been hard hit by the recession, or by other forces undermining their communities due to collapsing home values and excessive foreclosures.  Homeowners and buyers in these communities often face difficulties in rehabbing their single family residential properties, since the financing can be hard to obtain if the acquisition price plus the costs of rehab may exceed the post-rehab appraised value. 

Currently, interagency guidelines establish SLTV expectations (Guidelines). Generally, they provide that banks should not exceed 90 percent LTV on single-family home mortgage loans, without credit support such as mortgage insurance, readily marketable collateral, or other acceptable collateral.[4] Under the Guidelines, banks may make exceptions on a case-by-case basis. Although banks can currently make use of the exception authority under the SLTV guidelines, the OCC is proposing to provide a programmatic approach consistent with safe and sound lending, which can have a more significant impact in stabilizing and revitalizing whole communities.


In our opinion, OCC’s proposal sets forth a reasonable approach, subject to the following comments and concerns:

I.Two distinct circumstances should be treated differently


  1. Home purchase loans with 91-97% LTVs to be held in portfolio on a programmatic basis, beyond the individual exception cases already permitted under current guidance. FHA, VA, USDA, Fannie Mae, and Freddie Mac have for many years supported these loans, whose performance is well established and amply documented. These loans generally involve only moderately higher risk than loans with lower LTVs, assuming prudent product design and underwriting policies.  It is reasonable to infer that banks will be at least as prudent in making loans for their own portfolios as they are when they transfer the credit risk to government agencies and the government-sponsored enterprises. The Draft Bulletin could facilitate bank lending on a more programmatic basis, but it establishes excessively narrow terms for making these loans. These loans should not be limited to:
    1. Community revitalization areas. Loans should be broadly available, at least in low- and moderate-income areas or for low- and moderate-income borrowers. Borrowers will not be under-water at the time of loan origination.
    2. State/local government supported revitalization activity. This requirement is more appropriate where the initial LTV will exceed 100% and concerted governmental support is integral to a revitalization strategy designed to raise home values above the outstanding loan balance.
    3. Loan amounts under $200,000, especially in higher-cost areas. For example, the Massachusetts Housing Partnership works with banks to make loans to first-time buyers with incomes below the area median in 26 “Gateway Cities,” where 55% of the 691 loans have exceeded $200,000, and in Boston, where 72% of the 207 loans have exceeded $200,000.

In addition, refinancing loans should be permitted provided that the borrower does not take cash out. Refinancing will permit home owners to take advantage of lower interest rates and reduce monthly payments, shorten the loan term, or both.


b)    Loans with LTVs perhaps well above 100% in conjunction with rehabilitation activity in distressed LMI communities. Because we expect these loans would represent a very small share of a bank’s mortgage lending, they should not present safety and soundness concerns for a bank. Nevertheless, these loans could be important for communities and consumers. Such loans should be structured with great care to ensure that borrowers are likely to have positive equity within a reasonable period even if property values do not rise substantially. 


II.Unnecessarily burdensome practices


The required processes would be disproportionately burdensome for a de minimus volume of activity.  For example, we believe it would be both impractical and unnecessary for banks to get board/committee approval of detailed policies, as well as quarterly reporting.  Banks’ internal risk management structures should be sufficient to oversee this lending. The reporting requirements should provide OCC with sufficient data to track performance without requiring banks to make data system changes that would be time-consuming and not cost-effective. While it is important to ensure the bank programs are well structured, banks could address this concern by providing program parameters in advance to OCC. Excessively burdensome requirements will actively work to undermine the goal of the Proposed Bulletin, which is to support bank efforts to make loans with LTVs greater than 90% in communities targeted for revitalization.



III.Relationship to Interagency Guidelines

We would appreciate more clarity regarding the relationship of the Draft Bulletin to the existing interagency Guidelines and the Interagency Guidance on High LTV Residential Real Estate Lending, October 8, 1999 (Guidance). Would the Guidance continue to apply to loans made under an approved program, or does the program trump the Guidelines?  For example the Guidance calls for quarterly reporting to the Board on aggregate amounts of loans in excess of the SLTV. Yet, nothing in the Draft Bulletin indicates the need for quarterly reporting.  Does the quarterly requirement to report to the board on HLTV not apply to these programs under the proposal, once approved?


  1. Policy reconsideration

Under the Draft Bulletin, the OCC states: “At least annually, the OCC will assess whether the programs are contributing to the revitalization of targeted communities and whether the banks are adequately controlling the risks associated with such higher loan-to-value (LTV) lending.”   We would appreciate clarification that the OCC’s annual review is of the overall guidance, not individual bank programs. We believe it should rely on regular exam cycles to determine the program’s continued viability, and not subject the participating banks to another layer of supervision. 


V.Protection from compliance risk & CFPB participation

HLTV loans, albeit without the levels of controls under Ability to Repay and those proposed in the Draft Bulletin, have in the past been associated with somewhat higher risk lending practices. Indeed, the Interagency Guidance itself states, “Institutions that originate or purchase high LTV loans must take special care to avoid violating fair lending and consumer protection laws and regulations. … An adequate compliance management program must identify, monitor, and control the consumer compliance risks associated with high LTV lending.” We believe that the latter compliance management program is precisely what the Draft Bulletin is intended to ensure, protecting consumers and managing institutional risk. However, it is possible the HLTV lending in a bank’s program may lead to higher rates of default notwithstanding the best efforts of the bank and the OCC. If that should occur, the bank needs to be protected from liability and enforcement actions, or banks may be reluctant to participate and the goals of the program will be undermined. 

For many national banks, the Consumer Financial Protection Bureau (CFPB) is the primary consumer regulator.  Similarly, national banks are subject to Fair Housing Act regulations and interpretations issued by HUD.   We would therefore recommend the participation of the CFPB and HUD in the issuance of a final Bulletin, or some other clear endorsement of the consumer protection elements in the guidance. This may help provide some additional protection against claims that loans made according to the bank’s approved policies and procedure, merely by virtue of being higher LTV, are alleged to be in violation of ECOA or Fair Housing, or otherwise unfair, abusive or deceptive. Similarly, the notice requirement will be subject to approval by the OCC under the Draft Bulletin, and therefore may be insurance against claims that the disclosures are inadequate or deceptive, or that consumers were harmed by the failure to understand them.  A clarification of that by the OCC, CFPB and HUD would be beneficial to the overall purposes of the guidance on HLTV lending in communities targeted for revitalization.



Subject to the comments noted above, we generally support the OCC’s efforts to provide guidance for its banks in managing risks for certain higher LTV lending in communities targeted for revitalization. Feel free to contact us with any questions.



Steven I. Zeisel

Executive Vice President & General Counsel

Consumer Bankers Association



Benson F. Roberts

President & CEO

National Association of Affordable Housing Lenders



Robert R. Davis

Executive Vice President

American Bankers Association



[1] The American Bankers Association is the voice of the nation’s $16 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people, safeguard $12 trillion in deposits and extend more than $8 trillion in loans.

[2] The Consumer Bankers Association (CBA) is the trade association for today’s leaders in retail banking – banking services geared toward consumers and small businesses. The nation’s largest financial institutions, as well as many regional banks, are CBA corporate members, collectively holding two-thirds of the industry’s total assets. CBA’s mission is to preserve and promote the retail banking industry as it strives to fulfill the financial needs of the American consumer and small business.

[3] NAAHL is the national alliance of leading private capital providers for affordable housing and community revitalization. NAAHL is where experienced banks and mission-driven lenders and investors find common ground on effective policy and practice to expand economic opportunity.

[4] Interagency Guidelines for Real Estate Lending Policies, dated December 1992. For national banks, see 12 CFR Part 34, Appendix A to Subpart D. In regard to High LTV lending, see also, Interagency Guidance on High LTV Residential Real Estate, October 8, 1999.