PDFWAC 208-512-430
Subprime mortgage lending—Is there a list of subjects that banks, savings banks and savings associations must include in their policies and procedures?
Yes, the guidance requires all financial institutions, including banks, savings banks and savings associations, to focus on the following subjects and apply the relevant ones to their existing policies and procedures:
(1) Help borrowers understand ARM risks, including:
(a) Low initial payment;
(b) High or unlimited reset rate caps;
(c) Low or no documentation loans;
(d) Problems of frequent refinancing;
(e) Risk layering;
(f) Simultaneous second lien loans;
(g) Prepayment penalties;
(h) FDIC or FRB prohibited practices (banks, savings banks and savings associations).
(2) Understand portfolio and risk management practices, including:
(a) Relationship between subprime lending and predatory lending;
(b) Risks of loans based on foreclosed or liquidation value;
(c) Problem of loan "flipping";
(d) Fraud detection;
(e) Use of qualifying standards;
(f) Maintenance of appropriate capital levels;
(g) Use of appropriate allowance for loan and lease loss levels;
(h) Risks of stated income loans.
(3) Underwriting standards.
(4) Workout arrangements.
(5) Consumer protection principles, including:
(a) Use of a summary disclosure form;
(b) Avoidance of steering borrowers to inappropriate products;
(c) Explanation of payment shock risk;
(d) Explanation of prepayment penalty;
(e) Explanation of balloon payment;
(f) Explanation of costs of low documentation or stated income loans;
(g) Compliance with the Truth in Lending Act and other federal requirements;
(h) Importance of good consumer communications in promotional materials and product descriptions;
(i) Explanation of borrower responsibility for taxes and insurance.
(6) Development and maintenance of strong internal controls, including:
(a) Management of deals with third-party originators;
(b) Management of secondary market risk;
(c) Effective management information and reporting;
(d) Use of stress testing and performance measures;
(e) Actual practices consistent with policies.
[Statutory Authority: RCW 43.320.040, 43.320.050, 30A.04.030, 30A.12.060, 30A.04.140, 30A.04.210, 30A.04.212, 30A.60.010 – [30A.60.]901, 30A.08.140, 30A.08.150, 30A.04.125 and section 939A of the Dodd-Frank Act. WSR 17-24-053, § 208-512-430, filed 12/1/17, effective 1/1/18. Statutory Authority: RCW 19.144.040 [19.144.030]. WSR 08-22-070, § 208-512-430, filed 11/4/08, effective 12/5/08.]