Comptroller’s Handbook A-MB Safety and Soundness Capital Asset Sensitivity to Other Adequacy Quality Management Earnings Liquidity Market Risk Activities (C) (A) (M) (E) (L) (S) (O) 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 Comptroller’s Handbook i Mortgage Banking Version 1.2 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 Comptroller’s Handbook ii Mortgage Banking Version 1.0 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 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-be- published “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 Comptroller’s Handbook 1 Mortgage Banking Version 1.0 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