Advisories on Predatory and Subprime Lending Flashcards Preview

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Flashcards in Advisories on Predatory and Subprime Lending Deck (30):
1

The senior lender at ABC bank would like to make stated income mortgage loans (i.e., loans where the bank does not verify the applicant’s income) to mortgage customers, including subprime borrowers. Under the statement on subprime mortgage lending, which of the following is the best statement of the bank’s responsibility regarding this new program?

a. Due to the risks, it should not implement such a program for subprime borrowers
b. The bank should make a policy for this program that includes mitigating factors for the risks
c. The bank should set stringent debt-to-income ratios for these loans
d. The bank should establish workout procedures for such loans in advance of making them.

b. The bank should make a policy for this program that includes mitigating factors for the risks

Interagency Statement on Subprime Mortgage Lending
Outline VI C(2)(g)

2

According to the 2007 interagency statement on subprime mortgage lending, what should an institution offering mortgage loans to subprime borrowers provide before submission of an application?

a. Information on local residential real property values
b. Payment shock information
c. Truth in Lending disclosures
d. Initial escrow statements

b. Payment shock information

Interagency Statement on Subprime Mortgage Lending
Outline VI E(5)(a

3

The OCC recommends all but one of the following actions to help prevent a national bank’s purchasing or acquiring predatory or abusive loans. Which practice is NOT recommended?
a. Establish policies on the bank's relationship with third-party brokers and originators
b. Review loan documentation
c. Audit the third-party broker
d. Require the broker to establish a reserve account for legal contingencies

d. Require the broker to establish a reserve account for legal contingencies

OCC-AL 2003-3
Outline III D

4

ABC National Bank regularly purchases mortgage loans from ACME Mortgage Company, a local mortgage broker. ACME places a mandatory arbitration clause in each of its mortgage documents. ACME believes this clause is necessary because of state laws governing arbitration. Is this clause a problem for ABC National?

a. No, unless other predatory or abusive lending practices are evident in the loans sold by ACME.
b. Yes, the clause is a sign of an abusive lender, and the bank should not purchase the loans.
c. Yes, the bank should make ACME strike the clause from future loans.
d. No, this is a common practice and the bank can ignore it.

a. No, unless other predatory or abusive lending practices are evident in the loans sold by ACME.

OCC-AL 2003-2
Outline II C.
As noted in the outline, use of mandatory arbitration clauses may be a signal that an institution is marketing predatory or abusive loans. However, such clauses are not unfair in and of themselves. In the case of ACME and ABC National Bank, the use of mandatory arbitration clauses does not, in and of itself, indicate a problem.

5

Second State Bank offers a mortgage product that involves simultaneous second lien loans. These include a first lien for up to 90 percent of the purchase price and a second loan for the down payment, secured by a second lien on the property. The bank would like to be in full compliance with the Interagency Guidance on Nontraditional Mortgage Product Risks. Which of the following should Second State Bank incorporate into its loan program?

a. Risk management procedures to measure the risk of all simultaneous second lien loans and report results to management
b. A 100 percent loan loss reserve on all simultaneous second lien loans
c. A product combining simultaneous second lien loans with negative amortization features made to nonowner occupied borrowers
d. A prepayment penalty on all simultaneous second lien loans

a. Risk management procedures to measure the risk of all simultaneous second lien loans and report results to management

Outline V B.
The bank should make sure management is aware of the risk of its nontraditional mortgage portfolio, segmented by product.

6

First National Bank is preparing for a regulatory examination that will include a HELOC portfolio acquired through a merger last year. The Risk Management team is reviewing internal controls, policies, and procedures to ensure the process for handling HELOC transactions meets expectations outlined in the Interagency Guidance on Home Equity Lines of Credit Nearing Their End of Draw Period. Which of the following should not be evidenced in the bank’s current HELOC risk management practices?

a. Detailed monthly reporting on end-of-draw exposures is provided for inclusion in Allowance for Loan and Lease Losses (ALLL) estimates.
b. When working with a high-risk borrower, the bank evaluates their ability to repay the loan.
c. Borrowers are directed to contact the Bank's customer service team two weeks before their end-of-draw date to discuss alternative repayment options.
d. The consumer lending quality assurance team performs quarterly reviews on a sample of HELOC transactions nearing their end-of draw period.

c. Borrowers are directed to contact the Bank's customer service team two weeks before their end-of-draw date to discuss alternative repayment options.

Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods
Outline VII C(4) and C(6)(a)

7

Before a bank purchases subprime loans, what must the purchasing bank do?

Due diligence must be performed to consider the costs of servicing the assets and the loan losses that may occur.

8

What are the risk management responsibilities for banks that participate in subprime lending?

- Subprime lending activities must be consistent with business strategy and risk tolerances
- Staff must have sufficient expertise
- The bank must have an adequate lending policy that has defined underwriting criteria, goals, portfolio targets and limits, among other things
- The bank must perform due diligence prior to purchasing subprime loans from other lenders/dealers
- The bank must establish loan administration procedures.
- Bank must review and monitor subprime loans in its portfolio
- Bank must periodically evaluate the program

9

T/F: As a part of a bank's subprime lending responsibilities for risk management, the bank should document the methodology for Allowance for Loan and Lease Losses (ALLL) evaluations.

True.

10

What is the predatory or abusive practice where a borrower may have frequent refinancings that are not beneficial to the borrower? This practice is seen as unfair because it can result in borrower injury from the fees imposed and from the fact that it decreases home equity and increases the consumer's debt burden, thus increasing the chances of foreclosure.

Loan flipping

11

What is the predatory or abusive practice where the lender has excessive and hidden fees in the amount financed?

Packing

12

This predatory or abusive practice uses _____ payments to conceal the true burden of the financing and to force borrowers into costly refinancings or foreclosures.

Balloon

13

The use of mandatory ______ clauses can be seen as a predatory or abusive practice.

arbitration

14

Offering a single-premium ______ life insurance policy can be seen as a predatory or abusive practice.

credit

15

This term refers tot he practice of making loans secured by the consumer's home, but with high, up-front fees that are financed and secured by the home.

Equity stripping

16

What is a traditional broker transaction?

Transactions in which a broker refers an application to the institution and the loan is closed under the institution's name.

17

What is a table-funded loan?

Loans that are closed in the name of a third party but in which the institution provides the loan funds and immediately acquires the loan.

18

What is a loan purchase (where the loan is purchased from another institution)?

Loans that are purchased from a third party after the loan is made.

19

What is a payday loan?

Small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment, including SS checks.

20

What makes payday loans so costly?

They're usually priced as fixed-dollar fees that translate into high APRs.

21

A bank should have less than __% of its Tier 1 capital concentrated in payday loans or it will be criticized for failing to diversify risks.

25%

22

Minimum capital requirements are not enough to offset the risks of payday loans. Banks should hold capital against its subprime portfolio in amounts that are __ to __ times greater than normal.

1.5
3

23

Banks must maintain an ______ (__) adequate to absorb estimated credit losses from payday loans. Banks should evaluate the collectability of accrued fees and finance charges on payday loans and ensure that this income is appropriately measured.

Allowance for loan and lease losses (ALLL)

24

Payday loan portfolios should be classified as "___."

substandard

25

Payday loans outstanding for more than __ days from origination should be classified as losses.

60

26

One of the recommended practices for subprime lenders is to provide communications that apprise consumers of _____ _____, the potential payment increases including circumstances in which negative amortization or interest rates reach a contractual limit.

payment shock

27

When ____ ____ is possible, consumers should be given notice of the potential for increased principal and decreased equity in the property .

negative amortization

28

If this is charged, the consumer should be informed of the fact and alerted to the need to ask about the amount of the penalty.

prepayment penalty

29

Lenders should provide information to consumers if there are ramifications for lack of _____ for taxes and insurance, detailing who is responsible for paying taxes and insurance and the fact that their costs may be substantial.

esrowing

30

Management is expected to contact borrowers through outreach programs well before their end of draw dates (__ to __ months or more).

6
9