Division of Banks

Regulatory Bulletin 5.1-103: Guidance on Non-Traditional Mortgage Product Risks FAQ's

QUESTION: Does Regulatory Bulletin 5.1-103 hold each mortgage lender and broker ("provider") responsible for ensuring that the loan terms and underwriting standards being used by each of the other parties with whom they transact business are consistent with prudent lending standards?

ANSWER: Yes. The Guidance states that providers should have strong systems and controls in place for establishing and maintaining relationships with third parties, including procedures for performing due diligence. In essence, providers that rely on third parties to transact business need to ensure that lending standards are not compromised by such third parties, and that mechanisms are in place to mitigate any risk to such standards throughout the lending process. For example, mortgage lenders often utilize mortgage brokers to originate nontraditional mortgage loans. As set forth more fully in the Guidance, lenders and brokers should have systems and controls in effect to ensure that the parties conduct due diligence in selecting and maintaining third party relationships. Mortgage lenders should monitor the quality and integrity of originated applications placed through third parties. Mortgage brokers should monitor guidelines and instructions provided by the lender to ensure that such standards do not cause the mortgage broker to compromise compliance with either the mortgage broker's own nontraditional mortgage product origination standards or applicable laws and regulations. Providers should ensure that such procedures set forth remedial measures to be followed when a potential conflict or violation is detected.

However, the Guidance should not be interpreted as modifying existing provisions of statute, as enforced by the Division, that mortgage brokers are not authorized to underwrite mortgage loans. Loan underwriting remains a function of the lender and, as such, the responsibility to maintain sound policies and practices in the underwriting of nontraditional mortgage products remains with the lender.

QUESTION: Does the Division intend on issuing model consumer disclosures or proposed illustrations similar to those provided in the federal interagency guidance?

ANSWER: The Division has closely reviewed the model illustrations that were published in coordination with the federal interagency guidance and is considering issuing similar illustrative samples which may be used by providers conducting business in Massachusetts. It is currently anticipated that the Division would permit a period for public comment on any proposed illustrations or disclosures.