Washington Administrative Code › Title 208 - Financial Institutions, Department of (See also Titles 50, 419, and 460) › Chapter 208-620 - Washington Consumer Loan Act › INVESTIGATIONS › Section 208-620-613 - When I develop policies and procedures to implement the federal guidelines on applicable conventional residential mortgage loans, what topics must be included?

Current through Register Vol. 24-14, July 15, 2024
The policies and procedures must include, at a minimum,
							underwriting standards, risk management, consumer protection, and control
							systems. If you only broker residential mortgage loans under your CLA license,
							your policies and procedures must comply with WAC
							208-660-500. For purposes of this
							section, the definition of "subprime" and "subprime loans" is taken from the
2001 Interagency Expanded Guidance for Subprime Lending
							Programs
(an attachment to SR 01-4 (GEN), January 31, 2001, by the
							Board of Governors of the Federal Reserve System, Division of Banking,
							Supervision and Regulation).
(1)
						Underwriting standards. To ensure that underwriting standards are consistent
						with prudent lending practices, the underwriting standards should include, at a
						minimum, an analysis of borrower characteristics, loan product attributes, and
						the borrower's ability to repay the obligation.
(a) Analysis of borrower characteristics. The
						analysis must include tolerances for combining borrowers with certain
						characteristics with certain nontraditional loan products.
The criteria or range of reasonable tolerances should
							consider the characteristics listed in the
2001 Interagency Expanded
							Guidance for Subprime Lending Programs
.
(b) Loan product attributes. Products with
						the following attributes, when combined with the borrower characteristics above
						result in higher risk. The risks are increased if borrowers are not adequately
						informed of the product features and risks.
. Low initial payments based on a fixed introductory rate
							that expires after a short time and then adjusts to a variable index rate plus
							a margin. Because initial and subsequent monthly payments are based on these
							low introductory rates, a wide initial spread means that borrowers are more
							likely to experience negative amortization, severe payment shock, and an
							earlier than scheduled recasting of monthly payments. Loans made to subprime
							borrowers must not contain any provisions that may lead to negative
							amortization.
. Very high or no limits on how much the payment amount or
							the interest rate may increase.
. Limited or no documentation of the borrower's income.
							Stated income is only acceptable if there are mitigating factors that clearly
							minimize the need for direct verification of repayment capacity. Licensees
							generally must be able to readily document income using recent W-2 statements,
							pay stubs, or tax returns. An exception to this is when the loan product
							underwriting itself contemplates reduced documentation (for example, FHA
							loans).
. Substantial prepayment penalties or prepayment penalties
							that extend beyond sixty days prior to the date the interest rate will
							reset.
. Simultaneous second lien loans. When features are layered,
							mitigating factors should be present to support the underwriting decision and
							the borrower's repayment capacity.
(c) Ability to repay. For all nontraditional
						mortgage loan products, the analysis of a borrower's repayment capacity must
						include an evaluation of their ability to repay the debt by final maturity at
						the fully indexed rate, assuming a fully amortizing repayment schedule. In
						addition, for prime borrowers qualifying for loan products that permit negative
						amortization, the repayment analysis must be based on the initial loan amount
						plus any balance increase that may accrue from the negative amortization
						provision. The analysis should avoid over reliance on credit scores as a
						substitute for income verification. The higher a loan's credit risk, either
						from borrower characteristics or loan features, the more important it is to
						verify the borrower's income, assets, and outstanding liabilities.