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+--------+---+---------------------------------------------------------+---+
| ## Com |   |                                                         |   |
| ptroll |   |                                                         |   |
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|        |   |                                                         |   |
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| >      |   |                                                         |   |
|  Banks |   |                                                         |   |
+--------+---+---------------------------------------------------------+---+
| ## Su  |   | Avoiding Predatory and Abusive Lending                  |   |
| bject: |   |                                                         |   |
|        |   | Practices in Brokered and Purchased Loans               |   |
+--------+---+---------------------------------------------------------+---+

**TO:** Chief Executive Officers of All National Banks and National Bank
Operating Subsidiaries, Department and Division Heads, and All Examining
Personnel

##### INTRODUCTION AND PURPOSE

The Office of the Comptroller of the Currency (OCC) has taken a variety
of steps to guard against national banks becoming involved in predatory
and abusive lending practices.[^1] One dimension of the OCC's concern in
this area relates to the need for national banks to exercise appropriate
diligence when they make or purchase loans that are originated through
mortgage brokers or other intermediaries. National banks should have in
place procedures and standards adequate to ensure that their broker
arrangements and loan purchases do not present unwarranted risks.

Accordingly, the OCC is issuing this advisory letter to alert national
banks and their operating subsidiaries (collectively referred to as
national banks) to the risks they may confront if they make loans
through brokers or obtain loans through purchase transactions that
contain terms or reflect practices that may be characterized as abusive
or "predatory." Such loans present significant legal, reputation, and
other risks, in addition to the heightened credit risk assumed in cases
where the borrower lacks the ability to repay the loan without resorting
to liquidation of the collateral. This guidance applies to (1)
traditional broker transactions in which a mortgage broker refers an
application to the bank and the loan is closed in the bank's name; (2)
"table funded" loans that are closed in the name of a third party, but
in which the bank provides the loan funds and immediately acquires the
loan; and (3) loan purchase transactions where the loan is initially
made and funded by a third party who subsequently sells the loan to the
bank (whether or not the bank performs or participates in the
underwriting of the loan).[^2] Although the specific nature and degree
of the risks presented may vary among these different categories of
transactions, the general principle of this guidance --- that banks must
maintain strong and appropriate controls over all loan origination and
purchase functions, including loan sourcing, processing, underwriting,
and closing --- pertains to them all.

The OCC expects that national banks will take affirmative steps to
address the risks of these transactions through, among other things,
appropriate due diligence, mortgage broker agreements, and ongoing
monitoring of their third-party relationships. This advisory letter
provides specific recommendations for accomplishing these objectives.

National banks that fail to address these risks may be subject to
supervisory and other actions by the OCC. Moreover, the OCC will take
such actions as may be appropriate to address misconduct by mortgage
brokers and other third parties that deal with national banks, and will
work closely with agencies having primary enforcement authority over
such third parties to combat predatory lending practices.

###### 

###### BACKGROUND

Recent reports indicate that a majority of all home mortgages, and
approximately 50 percent of subprime loans, are originated through
mortgage brokers.[^3] Similarly, a large proportion of mortgages are
sold by the initial creditor to loan purchasers in secondary market
transactions.[^4]

These arrangements serve legitimate needs of the parties involved, and
the public interest, in a wide variety of ways. The greater number and
diversity of participants in the mortgage market enhances competition,
allows for the more flexible and efficient performance of origination
services and allocation of credit risk, and provides borrowers with
greater convenience and access to credit, particularly in areas that are
traditionally underserved.

At the same time, however, these arrangements may present risks for
participating parties, including the risk that they will become
implicated in predatory lending practices. Such practices --- in
addition to causing great harm to borrowers --- may expose participants
to significant legal liability and reputation risk, and subject the
ultimate lender to the high credit risk of lending to a borrower who
lacks the ability to repay the loan without resorting to collateral.

Federal laws and regulations that govern mortgage and other lending
transactions do not contain a comprehensive definition of "predatory" or
"abusive" lending practices. However, the OCC believes that a
fundamental characteristic of predatory lending is the provision of
credit to borrowers who simply cannot afford the credit on the terms
being offered. Typically, such credit is underwritten predominantly on
the basis of the liquidation value of the collateral, without regard to
the borrower's ability to service and repay the loan according to its
terms, absent resorting to that collateral. When a loan has been made
based on the foreclosure value of the collateral, rather than on a
determination that the borrower has the capacity to make the scheduled
payments in accordance with the terms of the loan, the lender is
effectively relying on its ability to seize the borrower's equity in the
collateral to satisfy the obligation (including accrued interest) and to
recover the typically high fees associated with such credits. As a
result, such credits experience foreclosure rates higher than the norm.

Predatory loans often include features that are designed to strip away
or reduce borrowers' equity in the collateral for the loan, and thus
enhance the likelihood of foreclosure. The mechanisms by which this
"equity stripping" may occur are various, and include lending without
regard to repayment ability, "loan flipping" (refinancings that occur in
circumstances that result in little or no economic benefit to the
borrower, with the objective of generating additional loan points, loan
fees, prepayment penalties, and fees from financing the sale of
credit-related products), and "fee packing" (including in the loan
principal amount such costs as points, mortgage broker fees, prepayment
penalties on a prior loan, and charges for related products such as
credit insurance). The potential for abuse is exacerbated when these
fees and other charges far exceed those that would reflect the true
costs and risks of the transaction, or are assessed and included in the
loan principal without the borrower's informed consent. Finally,
predatory lending may often involve fraudulent, deceptive, or
high-pressure sales tactics, particularly against older borrowers, or
persons who are, or are perceived to be, less financially sophisticated
or otherwise vulnerable to abusive practices (for example, persons with
limited access to mainstream sources of credit).[^5]

**RISKS OF PREDATORY BROKERED AND PURCHASED LOANS**

**Credit Risk**

As noted above, a departure from fundamental principles of loan
underwriting --- lending without a determination that a borrower can
reasonably be expected to repay the loan from resources other than the
collateral security for the loan, and relying instead on the foreclosure
value of the borrower's collateral --- generally forms the basis of
abusive lending. Such transactions are not consistent with established
lending standards[^6] and raise fundamental safety and soundness issues.
A loan made without regard to the borrower's ability to service and
repay the loan in accordance with its terms, without resorting to
collateral, presents significant safety and soundness concerns, and
making or purchasing such loans on a regular basis is inconsistent with
safe and sound banking practices. Such loans may pose both a higher risk
of default and a higher potential loss exposure at default.

Studies of predatory lending have indicated that national banks and
other federally supervised depository institutions generally are not
engaged in this sort of unsafe and unsound --- and abusive --- lending
practice. By contrast, because of the less intensive supervision of
mortgage brokers and other intermediaries, as well as other factors
(such as the fact that they do not intend to take on the ultimate credit
risk of the loan), there is a particular risk that such intermediaries
will be tempted to engage in abusive practices such as lending without
regard to repayment ability. Thus, mortgage broker and loan purchase
transactions may present a heightened risk that supervised institutions
will acquire loans that are made without a reasonable expectation that
the borrower will be able to repay the loan as structured. Moreover,
this credit risk would be increased in circumstances where the loan
decision relies on an appraisal that has inflated the true value of the
collateral, which may be more likely where the third party, who does not
bear the ultimate credit risk, selects the appraiser.[^7]

**Legal Risk**

Predatory and abusive loans originated through brokers or by third-party
lenders also present a wide range of heightened legal risks for national
banks, and could subject them to both supervisory action and civil
liability. For example, borrowers victimized by oppressive loan terms or
other unscrupulous conduct of a mortgage broker or loan originator may
have remedies against the ultimate creditor under common law theories of
fraud or unconscionability.

In addition, predatory loans originated through mortgage brokers, or
purchased from third-party lenders, may subject national banks to
liability or supervisory action under a wide range of federal consumer
protection laws. For example, in typical mortgage broker transactions,
the loan will be closed in the name of the bank as the initial creditor,
and thus, the bank generally will have direct liability for any
violations of law committed in connection with the loan. In addition,
the bank could be liable under agency, "common enterprise," or other
theories for violations committed by the broker, and may be jointly and
severally liable with the broker ---for example, under the Real Estate
Settlement Procedures Act (RESPA) --- for violations it is deemed to
commit in conjunction with the broker. Even in table-funded or purchase
transactions, a bank may have liability for violations of law as a
successor or assignee of the original creditor.

The legal risks of originating or purchasing predatory loans include the
following:

-   *[TILA and RESPA]{.underline}*. Mortgage lending activities are
    generally subject to the disclosure requirements and substantive
    protections of the Truth in Lending Act (TILA) and RESPA. Under
    TILA, the failure to provide timely and accurate disclosures of the
    cost of mortgage credit may result in mandatory administrative
    reimbursement of excess finance charges; statutory damages and other
    civil liability; and the borrower's right to rescind the entire
    transaction. TILA provides that actions generally may be brought
    against assignees if the violation for which the action is brought
    is apparent on the face of the disclosure statement.[^8] Thus, for
    example, if a mortgage broker prepares a TILA disclosure statement
    on behalf of a national bank, and that disclosure understates the
    finance charge (for example, by failing to reflect the broker's fee
    accurately), the bank would be subject to a restitution order, civil
    liability, and potential rescission of the loan. Violating RESPA's
    ban on kickbacks and certain other types of payments and charges
    would expose the bank to extensive civil liability (three times the
    amount of the charge for the settlement service in question) and
    criminal sanctions. Thus, if a broker engages in fee-splitting or
    gives or accepts referral fees in violation of these provisions, and
    is found to be acting as agent for or in conjunction with a national
    bank, the bank may be subject to these legal risks.

-   *[HOEPA]{.underline}*. High-cost mortgage loans originated through
    brokers or by third-party lenders must comply with the substantive
    protections and disclosure requirements set forth in the Home
    Ownership and Equity Protection Act (HOEPA). Among other things,
    HOEPA prohibits creditors from engaging in a pattern or practice of
    making certain high-cost loans based on the homeowner's equity
    without regard to repayment ability. HOEPA's substantive protections
    also restrict many of the other loan terms and structures often
    cited in discussions of predatory lending practices, including
    refinancings that may constitute loan flipping; payments to home
    improvement contractors; balloon payments; prepayment penalties; and
    negative amortization. Civil liability for HOEPA violations may
    include restitution of *all* the finance charges and fees paid by
    the consumer. HOEPA provides that assignees are subject to all
    claims and defenses that could be brought against the original
    creditor, unless the assignee can demonstrate "that a reasonable
    person exercising ordinary due diligence, could not determine, based
    on the documentation required by \[TILA\], the itemization of the
    amount financed, and other disclosure of disbursements," that the
    mortgage was covered by HOEPA.[^9]

-   *[Fair Lending Laws]{.underline}*. Predatory lending practices also
    can raise fair lending concerns. Predatory lenders often target
    identifiable groups of consumers that are (or are perceived to be)
    less financially sophisticated, currently have less access to
    mainstream lenders, or are otherwise vulnerable to abusive
    practices. If this targeting is based on age, race, national origin,
    gender, or other prohibited bases under the law, the abusive
    practices may represent violations of the Equal Credit Opportunity
    Act (ECOA) or the Fair Housing Act. Even if such targeting has been
    performed directly by a mortgage broker in soliciting applications,
    the creditor making the loan could nevertheless be subjected to
    civil lawsuits and government enforcement actions. ECOA also
    provides for successor liability by defining the term "creditor" to
    include "any assignee of an original creditor who participates in
    the decision to extend, renew, or continue credit."[^10]

-   *[FTC Act]{.underline}*. Finally, predatory loans may involve
    violations of the Federal Trade Commission Act (FTC Act), which
    makes unlawful "unfair or deceptive acts or practices." Practices
    involving fraud, misleading conduct, or material omissions of
    information concerning costs, risks, or other terms and conditions
    may violate the prohibition against deception. Under relevant
    precedents, this prohibition is violated by representations,
    omissions, acts, or practices that are material and are likely to
    mislead a *reasonable consumer in the audience targeted by the
    advertisement or other practice*. Loans with unconscionable terms
    may also involve violations of the prohibition against unfair acts
    or practices. Evidence of practices such as loan flipping, equity
    stripping, or the refinancing of loans made under governmental or
    nonprofit programs with terms favorable to the borrower may be
    indicative of unfair or deceptive practices that violate the FTC
    Act.[^11] Violations of the FTC Act would subject a national bank or
    its operating subsidiary to supervisory action by the OCC.

In addition to raising the foregoing issues under federal consumer
protection laws, abusive loans also may be inconsistent with various
safety and soundness regulations and guidelines.[^12]

**Other Risks**

Predatory lending also has generated concern and criticism because of
the harm that abusive loans may cause for families and communities, and
because such loans are perceived as inconsistent with national policies,
including the goals of fair access to credit, community development, and
the promotion of stable homeownership by the broadest spectrum of
America. For these reasons, predatory lending creates the risk that a
bank will be perceived unfavorably in its community, in the marketplace,
and by the general public. Even though the abusive practices in question
may have been perpetrated by a third party, the bank that makes or
purchases the loans may be tarnished, and seen as an institution that
does not consistently treat its customers fairly. When a mortgage loan
has been underwritten without regard to the borrower's ability to repay
the loan absent resorting to collateral, the institution holding the
loan at the time of foreclosure thus may face significant reputation
risk (as well as credit risk).

Lending practices that violate the fair lending laws, the FTC Act, the
consumer protections in HOEPA, or TILA's rescission provisions, or that
evidence other illegal credit practices, also may adversely affect an
institution's rating under the Community Reinvestment Act (CRA).[^13]
Because CRA performance must be considered in connection with various
applications for depository facilities, including branch applications
and bank merger transactions, predatory lending may impede a bank's
strategic plans to expand its operations or to combine with another
organization.

Safety and soundness concerns may also arise where lending practices
effectively foreclose access to a secondary market. Government-sponsored
enterprises (GSEs) active in the secondary market for mortgage loans
have taken a number of affirmative steps to reduce the possibility that
they will purchase abusive loans. These steps include a refusal to
purchase loans with certain terms, and plans to cease business with
lenders whose practices are inconsistent with the GSE's principles
against predatory lending. Thus, a bank making or obtaining loans
reflecting predatory terms may run the risk of losing an important
source of liquidity for its mortgage portfolio or general funding for
its operations. Moreover, the bank could be forced to keep in its
portfolio loans it had expected to sell, thereby exposing it to greater
default risk and risk of loss. Similarly, banks may be required to
repurchase predatory loans that they may have sold to third parties,
under the terms of the applicable purchase and sale agreement, and may
have limited legal or practical ability to require the broker or
originator through which it acquired the loan to do the same.

**RECOMMENDED PRACTICES**

National banks should take affirmative steps to mitigate the risks of
acquiring predatory and abusive loans through broker or purchase
transactions. A bank's policies and procedures relating to brokered and
purchased loans should be adequate to ensure that the loans it obtains
comport with the bank's general lending and other policies applicable to
loans that the bank makes directly, and with applicable safety and
soundness standards and consumer protection laws.

Prior OCC guidance on third-party relationships sets out measures
national banks should employ to implement effective risk management
processes.[^14] In addition to implementing this prior guidance,
national banks should take the following specific steps to address the
risks of obtaining predatory loans in broker or purchase transactions:

**Establishment of Policies and Procedures**

National banks should have clear procedures for entering into and
continuing relationships with third-party mortgage loan brokers and
originators, and standards that delineate underwriting and appraisal
requirements[^15] and unacceptable characteristics for brokered and
purchased loans.[^16] These policies should also delineate, if
applicable, the circumstances under which the bank will make through a
broker, or acquire in a purchase transaction, loans with features that
have been associated with abusive lending practices. [^17] As
appropriate, bank policies should address specific matters such as:

-   Frequent, sequential refinancings;

-   Refinancings of special subsidized mortgages that contain terms
    favorable to the borrower;

-   Single-premium credit life insurance or similar products;

-   Negative amortization;

-   Balloon payments in short-term transactions;

-   Prepayment penalties that are not limited to the early years of a
    loan;

-   Financing points, fees, penalties, and other charges;

-   Interest rate increases upon default;

-   Mandatory arbitration clauses; and

-   Acquisition of loans subject to HOEPA.[^18]

In addition, policies should address the maximum points and other
charges that may be imposed on brokered and purchased loans, as well as
the use of overages and yield-spread premiums as compensation vehicles.
In the case of brokered loans, these policies should address total
compensation to the broker and the lender, and establish limits on
broker compensation. The OCC notes that some national lenders have
already implemented these types of limits. Banks also should have
policies to help ensure that interest rates and other pricing terms for
brokered and purchased loans reasonably reflect the costs and risks of
making such loans.

Finally, bank policies and procedures should reflect and support the
need for strong and appropriate controls over all mortgage origination
functions, including loan sourcing, appraisals and other aspects of loan
processing, underwriting determinations, and loan closings. These
controls will vary, of course, with the risks presented by different
types of transactions. In developing policies and procedures,
institutions should carefully consider the strengths, capabilities, and
incentives of the third parties with whom they may be doing business. In
mortgage broker transactions, for example, banks may well determine that
it is appropriate to restrict brokers to loan sourcing functions, and to
require and ensure that processing functions, underwriting
determinations, and loan closings be conducted independently. Similarly,
for loan purchase transactions, bank policies should establish clear
standards relating to the degree of the bank's involvement in the
underwriting decision, and appropriate controls will vary in accordance
with this involvement. If a national bank has not made the initial
underwriting decision, it should take the steps necessary and
appropriate to determine that such loans have been underwritten
consistently with the bank's policies.

**Due Diligence**

National banks also should perform thorough due diligence, including
background checks, before entering into relationships with mortgage
brokers or third-party originators. These efforts should include a
review of the third party's:

-   General competence;

-   Business practices and operations, including potential conflicts of
    interest;

-   Reputation;

-   Financial capacity and condition;

-   Internal controls; and

-   Record of compliance with applicable licensing, consumer protection,
    and other laws.

In addition, these reviews should include an assessment of any
litigation, enforcement actions, or pattern of consumer complaints. The
due diligence process should also include a risk assessment and plans to
address identified risks. Based on this due diligence, national banks
should develop approved lists of brokers and originators with whom the
bank may transact business.

**Broker and Originator Agreements**

National banks should have written agreements with third-party brokers
and originators that specifically and clearly address the rights and
responsibilities of each party. Risks identified in the due diligence
process should be addressed in these agreements, and, if such risks
cannot be adequately mitigated, the agreement should not be consummated.

In addition, agreements with brokers and originators should specifically
address the bank's lending policies with regard to loan features such as
those described above, and should contain the third party's express
agreement to abide by those policies. Brokers and originators also
should specifically agree (1) to comply with all applicable laws,
including safety and soundness regulatory standards applicable to
national banks and laws prohibiting lending discrimination and unfair or
deceptive practices, and (2) to make best efforts to ensure that the
loans offered to borrowers are consistent with their needs, objectives,
and financial situation. The institution should reserve the right not to
make or purchase, and to put back to the broker or originator, any loans
failing to comply with these standards.

Agreements also should protect banks against risk by:

-   Ensuring that no inappropriate compensation incentives exist to
    induce brokers or originators to treat borrowers in a discriminatory
    manner, or otherwise unfairly;

-   Providing for indemnification to the bank upon breach of the
    agreement;

-   Enabling banks to exit the arrangement through clear termination
    rights and procedures; and

-   Providing for the bank's (and the OCC's) ability to access all
    records of the third party necessary to enforce and ensure
    compliance with the agreement and to audit the third party's
    operations.

In addition, agreements should stipulate clear minimum performance
standards and service levels.

If necessary, existing agreements with brokers and originators should be
revised to conform to the above requirements.

**Individual Loan Review (Quality Control Review)**

National banks should verify that brokers and originators have
established policies and procedures sufficient to ensure that loans to
be originated or purchased by the bank will comply with applicable laws
and the bank's policies. In appropriate circumstances --- for example,
at the outset of the third-party relationship, or after a particular
risk has been identified --- banks should conduct an appropriate
documentation review to confirm that transactions comply with the bank's
policies and legal requirements. As a general matter, banks should also
periodically perform such a documentation review on a random sampling of
broker and purchase transactions. Where banks do not reunderwrite each
loan, this file sampling should be adequate to ensure that loans are
being underwritten consistently with the bank's policies.[^19] Loan
reviews also should be sufficient to protect against potential fraud in
these transactions.

In addition, with respect to brokered loans, the bank should have in
place a process for review of written agreements between the borrower
and the broker to ensure that the agreements conspicuously disclose the
fees to be paid to the broker for its services, contain a specific
request for such broker services at that fee, and include a signed and
dated acknowledgment of receipt by the consumer before the broker
commences services. The bank should also retain copies of this
documentation.

**Monitoring and Management Information Systems**

Mortgage lenders need effective management information systems to
monitor the performance of brokers and originators from whom they
acquire loans. Institutions should be able to carefully monitor, track,
and evaluate a third party's compliance with the terms of its contract,
including minimum performance standards and service levels. National
banks should follow OCC guidance, as applicable, on monitoring the
financial condition, operations, and internal controls of third-party
brokers and originators with whom they establish relationships.[^20]
They also should carefully monitor such third parties' record of
compliance with applicable laws and bank policies.

In addition to such general monitoring, national banks should adopt
criteria and procedures for additional targeted reviews, as appropriate,
of brokers or originators whose loans exhibit unacceptable default,
foreclosure, or complaint rates; broker fees that significantly exceed
market rates or that do not comply with bank policies; potential
violations of law or bank policies; or other risks.[^21] Targeted
reviews may also be appropriate for brokers or originators whose
concentrations suggest that borrowers may have been targeted on the
basis of age, race, national origin, or gender. Management information
systems must be adequate to identify brokers or originators whose loans
show these risk characteristics.

**Corrective Action**

When brokers or originators are found to have violated bank policies,
applicable laws, or the provisions of their agreements, other than on a
clearly isolated and inadvertent basis, institutions should take prompt
and appropriate corrective action, including modification of loan terms
and termination of the relationship with the third party in question.

**CONCLUSION**

National banks may confront risks when they obtain loans through brokers
or through purchase transactions that contain or reflect abusive lending
practices. This advisory letter summarizes those risks and conveys the
expectation of the OCC that national banks will take affirmative steps
to avoid them. Failure to do so could raise serious supervisory
concerns, and could result in supervisory or other actions directed
against national banks, their operating subsidiaries, and the
third-party brokers and originators involved in the transactions.

For further information concerning the matters discussed in this
advisory letter, please contact the Community and Consumer Law Division
at (202) 874-5750, the Compliance Division at

\(202\) 874-4428, or the appropriate supervisory office.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

David Hammaker

Deputy Comptroller for Compliance

[^1]: *See, e.g.,* OCC Advisory Letter 2003-2 (Guidelines for National
    Banks to Guard Against Predatory and Abusive Lending Practices),
    February 21, 2003 (OCC Guidelines to Guard Against Predatory
    Lending); OCC Advisory Letter 2002-3 (Guidance on Unfair or
    Deceptive Acts or Practices), March 22, 2002; OCC Bulletin 2001-6
    (Expanded Guidance for Subprime Lending Programs), January 31, 2001;
    OCC Advisory Letter 2000-11 (Title Loan Programs), November 27,
    2000; OCC Advisory Letter 2000-10 (Payday Lending), November 27,
    2000; OCC Advisory Letter 2000-7 (Abusive Lending Practices), July
    25, 2000.

[^2]: This guidance is applicable both where the bank intends to hold
    the brokered or purchased loan in its portfolio and where it intends
    to resell the loan or pool it for securitization.

[^3]: *See* United States Department of the Treasury and United States
    Department of Housing and Urban Development, *Curbing Predatory Home
    Mortgage Lending: A Joint Report* (June 2000) (Treasury-HUD Joint
    Report), at 38, available at
    \[http://www.treas.gov/press/releases/reports/treasrpt.pdf\]. For a
    general discussion of characteristics of "subprime" lending, *see*
    OCC Bulletin 2001-6 (Expanded Guidance for Subprime Lending
    Programs), January 31, 2001; OCC Bulletin 99-15 (Subprime Lending:
    Risks and Rewards), April 5, 1999; and OCC Bulletin 1999-10
    (Interagency Guidance on Subprime Lending), March 3, 1999.

[^4]: *See* Treasury-HUD Joint Report at 39-44.

[^5]: *See generally* OCC Guidelines to Guard Against Predatory Lending.

[^6]: *See* 12 CFR 34, D. *See also* 12 CFR 30, Appendix A.

[^7]: *See generally* 12 CFR 34, C.

[^8]: 15 USC 1641(a) and (e).

[^9]: 15 USC 1641(d).

[^10]: 15 USC 1691a(e). *See* 12 CFR 202.2(l).

[^11]: *See* OCC Guidelines to Guard Against Predatory Lending, at 4-6.

[^12]: *See, e.g.,* 12 CFR 30, Appendix A, and 12 CFR 34, C and D.

[^13]: *See* 12 CFR 25.28(c). *See also* Interagency Questions and
    Answers Regarding Community Reinvestment, Q&A \_\_\_.28(c)-1, 66
    *Fed.Reg.* 36620, 36640 (July 12, 2001). A bank that engages in a
    pattern or practice of extending credit without assessing the
    borrower's ability to repay the loan --- in addition to violating
    HOEPA in some circumstances --- is not helping to meet the credit
    needs of the community consistent with safe and sound operations,
    and has acted contrary to the OCC's safety and soundness regulatory
    guidelines. *See* 12 CFR 30, Appendix A. Such an activity or
    practice also may adversely affect the OCC's evaluation of the
    bank's CRA performance. *See* OCC Guidelines to Guard Against
    Predatory Lending.

[^14]: *See* OCC Advisory Letter 2000-9 (Third-Party Risk), August 29,
    2000 (recommendations for vendor management programs) and OCC
    Advisory Letter 2001-47 (Third-Party Relationships: Risk Management
    Principles),

    November 1, 2001 (recommendations for third-party risk management
    process, including risk assessment and strategic planning, due
    diligence in selecting third-party providers, and contracting and
    oversight issues). *See generally* OCC Advisory Letter 2002-3
    (Guidance on Unfair or Deceptive Acts or Practices), March 22, 2002;
    OCC Bulletin 2001-6 (Expanded Guidance for Subprime Lending
    Programs), January 31, 2001; OCC Bulletin 99-15 (Subprime Lending:
    Risks and Rewards), April 5, 1999; OCC Bulletin 99-10 (Interagency
    Guidance on Subprime Lending), March 3, 1999; and OCC Banking
    Circular 181 (REV) (Purchases of Loans in Whole or in
    Part-Participations), August 2, 1984. *See also* United States
    Department of Housing and Urban Development, *Mortgagee Letter
    2002-21 (Due Diligence in Acquiring Loans)*, September 26, 2002.

[^15]: *See generally* 12 CFR 30, Appendix A, and 12 CFR 34, C and D.

[^16]: Guidelines developed by GSEs active in the secondary market for
    mortgage loans may provide a useful reference or starting point for
    national banks in establishing or enhancing their policies and
    procedures in this area. *See, e.g.,* Freddie Mac, "Protecting
    Borrowers from Predatory Lending Practices," (1997; revised 2002),
    available at
    \[http://www.freddiemac.com/corporate/affordhouse/predlend/apl_fact.html\];
    Fannie Mae, "Fannie Mae Chairman Announces New Loan Guidelines to
    Combat Predatory Lending Practices," News Release (April 11, 2000),
    available at
    \[http://www.fanniemae.com/newsreleases/2000/0710.jhtml\]. *See
    generally* Freddie Mac, *Discover Gold Through Quality: Wholesale
    Originations Best Practices* (June 1999; supplemented April 2000),
    available at \[http://www.freddiemac.com/dgtq\]. Banks may wish to
    familiarize themselves with these guidelines in order to understand
    clearly the characteristics of loans that are not acceptable to
    these GSEs. National banks purchasing mortgage-backed securities of
    issuers other than these GSEs should make reasonable efforts to
    determine whether such issuers use standards (e.g., like the
    standards of those GSEs) to prevent the inclusion of loans with
    predatory characteristics in their mortgage pools. Appropriate due
    diligence to reduce risks in such "private label" transactions would
    include both a review of the issuer's efforts to avoid predatory
    loans and, to the extent such information is available, the general
    reputation of the issuer and the originator(s) of the loans.

[^17]: Policies in this area also should ensure adequate documentation
    of the borrower's ability to service the debt, including
    verification of income and obligations, consistent with 12 CFR 30,
    Appendix A, and other applicable law. In addition, as appropriate,
    policies should address the use of multiple borrowers to satisfy
    debt-service coverage ratios to protect against reliance on the
    income of third-party guarantors or other obligors whose
    relationship to the borrower or to the collateral suggests that they
    may not, in fact, be relied upon to repay the loan, as structured,
    if necessary, to prevent default or foreclosure. Finally, policies
    in this area should also address debt-to-income and loan-to-value
    ratios to mitigate the risk of lending without regard to ability to
    repay.

[^18]: HOEPA imposes specific disclosure requirements and substantive
    restrictions on closed-end loans secured by a consumer's principal
    dwelling, other than a reverse mortgage or a loan to finance the
    acquisition or initial construction of the home, that are high-cost
    because they exceed specified federal statutory and regulatory
    interest rate and fee thresholds. *See* 15 USC 1639 and 12 CFR
    226.32.

[^19]: *See* OCC Banking Circular 181 (REV) (Purchases of Loans in Whole
    or in Part-Participations), August 2, 1984,

    at 4.

[^20]: *See* OCC Advisory Letter 2001-47 (Third-Party Relationships:
    Risk Management Principles), November 1, 2001, at 13.

[^21]: Documentation reviews may indicate problems such as: (1) an
    absence of signatures or dates on documents, or missing documents,
    or evidence that signatures were made on blank documents or were
    forged; (2) significant variations between the preliminary
    disclosures required to be provided to customers under TILA or RESPA
    and the final charges appearing on closing documents; (3) fees that
    appear to be duplicative, or otherwise unearned and unwarranted; or
    (4) materially misleading statements or omissions with respect to
    the costs, benefits, risks, and burdens of the transaction or some
    aspect thereof.