(Division of Credit Unions)
Effective Date of Rule: Thirty-one days after filing.
Purpose: Implementation of credit union compliance standards for Federal Interagency Guidance on Nontraditional Mortgage Product Risks and Statement on Subprime Mortgage Lending.
Statutory Authority for Adoption: RCW 43.320.040, 19.144.040 (chapter 108, Laws of 2008).
Adopted under notice filed as WSR 08-18-065 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Number of Sections Adopted in Order to Comply with Federal Statute: New 0, Amended 0, Repealed 0; Federal Rules or Standards: New 7, Amended 0, Repealed 0; or Recently Enacted State Statutes: New 7, Amended 0, Repealed 0.
Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, Amended 0, Repealed 0.
Number of Sections Adopted on the Agency's Own Initiative: New 0, Amended 0, Repealed 0.
Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 0, Amended 0, Repealed 0.
Number of Sections Adopted Using Negotiated Rule Making: New 7, Amended 0, Repealed 0; Pilot Rule Making: New 0, Amended 0, Repealed 0; or Other Alternative Rule Making: New 0, Amended 0, Repealed 0.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.
Linda K. Jekel, Director
Division of Credit Unions
"GUIDANCE" FOR CREDIT UNIONS
In 2007, governor Christine Gregoire convened the Washington state task force for homeowner security. The task force recommended including the federal guidance in state legislation. The 2008 Washington state legislature enacted SHB 2770, requiring the department of financial institutions to apply the two guidance documents to financial institutions in Washington. Starting in 2008, credit unions, banks, mortgage brokers and other Washington state financial institutions must have "policies and procedures" that use the guidance.
The guidance requires credit unions to be aware of portfolio and risk management practices, to use appropriate underwriting standards and to abide by consumer protection principles. Credit unions also need to maintain strong internal control systems. Many of the recommendations in the guidance are good business practices, and may already be followed by credit unions.
Not all of the elements of the guidance may be applicable to all credit unions. Credit unions 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;
– NCUA prohibited practices.
• 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.
There may also be other subjects contained in the guidance that may be relevant to some credit unions.
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 credit unions (DCU) for a copy of the documents.
Read these documents carefully to ensure your credit union's application of the law, and to comply with its required integration of the guidance into your policies and procedures. If your credit union needs help incorporating the guidance into your policies and procedures, contact your lawyer.
Also, the guidance is complex, and will result in variations in wording or applicability of guidance policies and procedures among credit unions, depending upon the size and complexity of that particular credit union, the characteristics of its membership base, and the type of mortgage lending it does, if any.
For supervision purposes, the division of credit unions will:
(1) Verify that a credit union has integrated the guidance into its policies and procedures, as part of its risk-focused exam. DCU will not mandate the length or exact wording used in the guidance policies and procedures.
(2) Review the guidance policies and procedures with the credit union, if a consumer complaint indicates a problem or issue regarding subprime and nontraditional mortgage lending practices.
(3) Verify that a credit union is following its policies and procedures.
The DCU expects prompt compliance by credit unions with the requirements of this rule.
The law provides DCU with examination, enforcement and investigation authority to take appropriate action against credit unions that are in noncompliance with the guidance policies and procedures requirement.