Risk Management Guidance for Higher Loan- to-Value Lending in Communities Targeted for Revitalization

On February 9, at the 2016 CRA Conference in Los Angeles the Comptroller of the Currency, Thomas Curry, announced a draft of a soon-to-be-published proposal to encourage banks to help revitalize "targeted" neighborhoods by engaging in higher loan-to-value mortgages.

The OCC recognizes that banks and other parties have expressed concern that depressed housing values in certain distressed communities in the United States inhibit mortgage lending in these communities. One way in which banks can support revitalization efforts in distressed communities is by offering mortgage products for purchasing, or purchasing and rehabilitating, one- to four-unit residential properties where the loan amount may exceed supervisory loan-to-value (SLTV) limits.

To be sure, the draft is talking about mortgages where:

  • The market value of a rehabilitated property likely will be less than the original loan amount upon completion of the rehabilitation.
  • The market value may continue to be less than the original loan amount thereafter and for the duration of the loan.
  • There may be financial implications if the borrower seeks to sell the property after rehabilitation and the sale price of such rehabilitated property is less than the outstanding loan balance at the time of such sale,

There are the usual caveats that such lending must be "prudent", but given the parameters outlined in the draft, "The OCC recognizes that eligible loans will have an LTV ratio equal to or exceeding 90 percent without mortgage insurance or readily marketable, or other acceptable, collateral" it is hard to imagine what would constitute prudence under those conditions.

The draft also offers the enticement that banks may receive Community Reinvestment Act consideration for SLTV exception loans depending on the specifics of the program".