Mortgage Banking, Comptroller's Handbook - U.S. Department of ...

Comptroller's Handbook

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Safety and Soundness

Capital Adequacy

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Asset Quality

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Management Earnings

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(E)

Liquidity

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Sensitivity to Market Risk

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Other Activities

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Mortgage Banking

Version 1.0, February 2014

Office of the Comptroller of the Currency

Washington, DC 20219

Version 1.0

Contents

Introduction ..............................................................................................................................1 Background ................................................................................................................... 1 Primary and Secondary Mortgage Markets ............................................................ 2 Fundamentals of Mortgage Banking....................................................................... 3 Common Mortgage Banking Structures ................................................................. 4 Mortgage Banking Profitability .............................................................................. 4 Statutory and Regulatory Authority.............................................................................. 9 Preemption and Visitorial Powers .............................................................................. 10 Capital Requirements.................................................................................................. 11 Risks Associated With Mortgage Banking ................................................................. 12 Credit Risk ............................................................................................................ 12 Interest Rate Risk .................................................................................................. 13 Liquidity Risk ....................................................................................................... 13 Price Risk .............................................................................................................. 14 Operational Risk ................................................................................................... 14 Compliance Risk ................................................................................................... 16 Strategic Risk ........................................................................................................ 18 Reputation Risk..................................................................................................... 19 Risk Management ....................................................................................................... 20 Management and Supervision............................................................................... 20 Internal and External Audits ................................................................................. 21 Information Technology ....................................................................................... 22 Mortgage Banking Functional Areas .................................................................... 22 Loan Production.................................................................................................... 23 Secondary Marketing ............................................................................................ 38 Servicing ............................................................................................................... 50 Mortgage Servicing Assets ................................................................................... 67

Examination Procedures .......................................................................................................75 Scope........................................................................................................................... 75 Management and Supervision..................................................................................... 80 Internal and External Audits ....................................................................................... 85 Information Technology ............................................................................................. 89 Loan Production.......................................................................................................... 92 Secondary Marketing ................................................................................................ 109 Servicing ................................................................................................................... 121 Mortgage Servicing Assets ....................................................................................... 133 Conclusions............................................................................................................... 138 Internal Control Questionnaire ................................................................................. 140 Verification Procedures ............................................................................................ 149

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Contents

Appendixes............................................................................................................................152 Appendix A: Sample Request Letter ........................................................................ 152 Appendix B: Hedging ............................................................................................... 159 Appendix C: Mortgage Banking Accounting ........................................................... 175 Appendix D: Common Mortgage Banking Structures ............................................. 194 Appendix E: Standards for Handling Files With Imminent Foreclosure Sale.......... 203 Appendix F: Risk Assessment Factors ..................................................................... 206 Appendix G: Glossary............................................................................................... 212 Appendix H: Abbreviations ...................................................................................... 226

References .............................................................................................................................228

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Introduction

The Office of the Comptroller of the Currency's (OCC) Comptroller's Handbook booklet, "Mortgage Banking," provides guidance for bank examiners and bankers on various mortgage banking activities, such as the purchase or sale of mortgages in the secondary mortgage market. Throughout this booklet, national banks and federal savings associations (FSA) are referred to collectively as banks, except when it is necessary to distinguish between the two.

Background

Mortgage banking generally involves loan originations as well as purchases and sales of loans through the secondary mortgage market. A bank engaged in mortgage banking may retain or sell loans it originates or purchases from affiliates, brokers, or correspondents. The bank may also retain or sell the servicing on the loans. Through mortgage banking, banks can participate in any combination of these activities.

Banks have traditionally originated residential mortgage loans to hold in their loan portfolios. Examiners should refer to the "Retail Lending Examination Procedures" and the to-bepublished "Residential Real Estate Lending" booklets of the Comptroller's Handbook for guidance on banks that primarily originate mortgage loans to be retained in their loan portfolios. More expansive mortgage banking activities are a natural extension of the traditional origination process. This booklet and the examination procedures it outlines are intended for banks that engage in purchases or sales of mortgages in the secondary market.

Mortgage banking is affected by changing economic conditions and new legislation, regulations, accounting principles, regulatory guidance, examination efforts, and legal actions. Numerous changes have addressed systemic issues revealed in the recent financial crisis, including deficiencies related to the origination and servicing of residential mortgage loans.

In 2010, Congress passed the Dodd?Frank Wall Street Reform and Consumer Protection Act (Dodd?Frank), which included a number of changes to consumer protection laws and created the Consumer Financial Protection Bureau (CFPB). The CFPB has undertaken various rulemakings to implement Dodd?Frank changes, including amending Regulation Z to implement changes to the Truth in Lending Act (TILA) and Regulation X to implement changes to the Real Estate Settlement Procedures Act (RESPA). For instance, in January 2013, the CFPB issued final rules amending Regulation X and Regulation Z to introduce new servicing-related standards and requirements. Other final rules further amend Regulation Z, including to require that creditors make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling, to establish certain protections from liability for "qualified mortgages," and to implement

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Introduction > Background

changes to the requirements for certain home-secured loans. Many of these rules are expected to become effective in January 2014.1

The CFPB's rulemaking efforts, however, are ongoing. Bankers and examiners should ensure that the standards they follow are current. Examiners should contact the OCC's Credit and Market Risk Division to obtain information on recent developments that are not reflected in this booklet. In particular, the booklet does not attempt to address the specific requirements of the various rules issued by the CFPB implementing requirements of Dodd?Frank, including amendments to Regulation Z (implementing TILA), Regulation X (implementing RESPA), and servicing standards, which are effective January 2014. The safety and soundness principals discussed in this booklet are consistent with those rules. Compliance with these and other finalized rules, such as the Qualified Residential Mortgage Rule, is a basic tenet of a safe and sound mortgage operation.

The mortgage banking industry is highly competitive and involves many types of firms, including brokers, correspondents, mortgage banks, commercial banks, investment banks, and savings associations. Some of these firms are small and local, while others are large and national. Banks and their subsidiaries and affiliates make up a large and growing proportion of the mortgage banking industry. Banks that originate or purchase residential loans need to have sound third-party risk management practices.

Mortgage banking activities generate fee income and may provide cross-selling opportunities that can enhance a bank's retail banking franchise. The expansion of traditional lending to encompass other mortgage banking activities has taken place in the context of a general shift by commercial banks from activities that produce interest income to ones that produce noninterest income and fees.

Information technology (IT), including business processes, has evolved into an increasingly important support function that facilitates mortgage banking operations. Sophisticated origination and servicing systems, Web-based applications, the use of third parties to perform business processes, and complex valuation models are notable examples. The increased reliance on technology and its dependency on data and telecommunication infrastructures have led to an increased number of risks that must be managed appropriately.

Primary and Secondary Mortgage Markets

A mortgage lender's key function is to provide funds for the purchase or refinancing of residential properties. This function is carried out in the primary mortgage market, in which lenders originate mortgages by lending to homeowners and purchasers. In the secondary mortgage market, lenders and investors buy and sell loans that were originated in the primary mortgage market. Lenders and investors also buy and sell securities in the secondary market that are collateralized by pooled mortgage loans.

1 More comprehensive information regarding Regulation X and Regulation Z, including recent amendments to those rules, is provided in other Comptroller's Handbook booklets, including "Truth in Lending Act" and "Real Estate Settlement Procedures Act" in the Consumer Compliance series.

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