Mortgage Banking, Comptroller's Handbook

Comptroller¡¯s Handbook

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Safety and Soundness

Capital

Adequacy

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Asset

Quality

(A)

Management

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Earnings

(E)

Liquidity

(L)

Sensitivity to

Market Risk

(S)

Other

Activities

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Mortgage Banking

February 2014

RESCINDED

This document and any attachments are replaced by version 1.0 of the

booklet of the same title published February 2014

Of?ce of the

Comptroller of the Currency

Washington, DC 20219

Contents

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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

Comptroller¡¯s Handbook

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Mortgage Banking

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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Comptroller¡¯s Handbook

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Mortgage Banking

Introduction > Background

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

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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.

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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.

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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¨CFrank Wall Street Reform and Consumer Protection Act

(Dodd¨CFrank), 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¨CFrank 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

Comptroller¡¯s Handbook

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Mortgage Banking

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¨CFrank,

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.

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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.

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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.

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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.

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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.

Comptroller¡¯s Handbook

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Mortgage Banking

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