(Division of Banks)
Effective Date of Rule: Thirty-one days after filing.
Purpose: To implement compliance standards for Washington state-chartered commercial banks, savings banks and savings associations as to Federal Interagency Guidance on Nontraditional Mortgage Product Risks and Statement on Subprime Mortgage Lending, consistent with RCW 19.144.040 [19.144.030] (section 4, chapter 108, Laws of 2008).
Statutory Authority for Adoption: RCW 19.144.040 [19.144.030] (section 4, chapter 108, Laws of 2008).
Adopted under notice filed as WSR 08-18-063 on September 2, 2008.
Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 0, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 1, Amended 0, Repealed 0.
Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.
Number of Sections Adopted on the Agency's Own Initiative: New 0, Amended 0, Repealed 0.
Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.
Number of Sections Adopted Using Negotiated Rule Making: New 1, Amended 0, Repealed 0; Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 0, Repealed 0.
Date Adopted: November 4, 2008.
Director of Banks
WAC 208-512-400 Purpose of these rules. These rules are designed to help Washington state-chartered banks (Title 30 RCW), savings banks (Title 32 RCW) and savings associations (Title 33 RCW) establish, reiterate, integrate and maintain their own policies and procedures regarding subprime and nontraditional mortgage lending guidance. These policies and procedures are required by a new state law, chapter 108, Laws of 2008 (chapter 19.144 RCW).
Not all of the elements of the guidance may be applicable to all banks, savings banks and savings associations, or to all other financial institutions. Banks, savings banks and savings associations must determine which elements are relevant to their operations, and incorporate only those subjects into their policies and procedures.
• Help borrowers understand ARM risks, including:
– Low initial payment;
– High or unlimited reset rate caps;
– Low or no documentation loans;
– Problems of frequent refinancing;
– Risk layering;
– Simultaneous second lien loans;
– Prepayment penalties;
– FDIC prohibited practices (banks, savings banks and savings associations);
– OTS prohibited practices (savings associations).
• Understand portfolio and risk management practices, including:
– Relationship between subprime lending and predatory lending;
– Risks of loans based on foreclosed or liquidation value;
– Problem of loan "flipping";
– Fraud detection;
– Use of qualifying standards;
– Maintenance of appropriate capital levels;
– Use of appropriate allowance for loan and lease loss levels;
– Risks of stated income loans;
• Underwriting standards.
• Workout arrangements.
• Consumer protection principles, including:
– Use of a summary disclosure form;
– Avoidance of steering borrowers to inappropriate products;
– Explanation of payment shock risk;
– Explanation of prepayment penalty;
– Explanation of balloon payment;
– Explanation of costs of low documentation or stated income loans;
– Compliance with the Truth in Lending Act and other federal requirements;
– Importance of good consumer communications in promotional materials and product descriptions;
– Explanation of borrower responsibility for taxes and insurance.
• Development and maintenance of strong internal controls, including:
– Management of deals with third-party originators;
– Management of secondary market risk;
– Effective management information and reporting;
– Use of stress testing and performance measures;
– Actual practices consistent with policies.
http://www.fdic.gov/news/news/press/2006/pr06086b.pdf; and http://www.fdic.gov/news/news/press/2007/pr07055a.html.
You can also click on the links on the DFI web site at www.dfi.wa.gov.
If you do not have internet access, you may contact the department of financial institutions, division of banks (division of banks) for a copy of the documents.
Read these documents to ensure proper application of the law to your institution and to comply with the required integration of the guidance into your policies and procedures. If your institution needs help incorporating the guidance or reconciling it to your policies and procedures, contact your legal counsel.
For supervision purposes, the division of banks will:
(1) Verify that an institution has integrated the guidance into its policies and procedures, as part of its risk-focused examination. Division of banks will not mandate the length or exact wording used in the guidance policies and procedures.
(2) Review the guidance policies and procedures with the institution, if a consumer complaint indicates a problem or issue regarding subprime and nontraditional mortgage lending practices.
(3) Verify that an institution is following its policies and procedures.
The division of banks expects prompt compliance by banks, savings banks and savings associations with the requirements of this rule.
The law provides the division of banks with examination, enforcement and investigation authority to take appropriate action against banks, savings banks and savings associations that are in noncompliance with the guidance policies and procedures requirement.