While banks must be prudent and follow applicable regulations, the latest guidelines from the Office of the Comptroller of the Currency may allow banks to justify a nuanced asset dissipation or depletion underwriting program, so long as it is backed by analysis.
On July 23, 2019, the OCC issued a bulletin reminding its regulated institutions to use safe and sound banking practices when underwriting a residential mortgage loan based on the applicant’s assets. While the bulletin does not provide much satisfaction for those seeking safe harbors or any specific guidance, it provides certain hints at what the OCC will look for in an examination.
Asset dissipation underwriting (or asset amortization or depletion underwriting) is a way for mortgage lenders to calculate a stream of funds derived from an applicant’s assets that could be available for loan payments, in addition to income (if any) received from employment or other sources. The bulletin notes that while the OCC’s regulated institutions have prudently administered asset depletion models for many years, examiners have seen an uptick that is unsupported by credit risk management practices and insufficiently compliant with existing regulations and guidelines.
One such existing regulation, which the bulletin mentions in a footnote, is the Consumer Financial Protection Bureau’s Ability to Repay/Qualified Mortgage (QM) Rule, applicable to most closed-end residential mortgage loans. That Rule allows a mortgage lender to consider an applicant’s current or reasonably expected assets in determining his/her ability to repay a mortgage loan, so long as the lender verifies the assets through financial institution statements or other reliable documents. Still, mortgage lenders must – when making QMs or non-QMs – calculate a debt-to-income ratio (DTI). (Non-QM lenders could also use a residual income figure.) Accordingly, if lenders are relying on an applicant’s assets, the lenders must come up with a monthly amount available for mortgage payments. However, unlike the Rule’s Appendix Q, which regulates how lenders may consider various types of income when making general QMs, neither the Rule nor Appendix Q specifies any requirements for unacceptable types of assets, discounts of asset values based on liquidity, amortization periods, or rate-of-return estimates.
While the OCC bulletin does not directly fill in any of those blanks, it does provide some clues.