Yes, the guidance requires all financial institutions, including banks, savings banks and savings associations, to focus on the following subjects and apply the relevant ones to their existing 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.
[Statutory Authority: RCW 19.144.040 [19.144.030]. 08-22-070, § 208-512-430, filed 11/4/08, effective 12/5/08.]