Tuesday, March 27, 2007

OCC: "concerned in 2002 with the growth of exotic mortgages"

by Calculated Risk on 3/27/2007 04:46:00 PM

Emory W. Rushton, Senior Deputy Comptroller and Chief National Bank Examiner of the Office, of the Comptroller Of The Currency (OCC) provided testimony today to the House Committee on Financial Services. From Rushton's oral testimony:

OCC became concerned in 2002 with the growth of exotic mortgages that have the potential for a big payment shock, and we responded in an escalating fashion, both formally and informally, privately and publicly. By 2005, we were instructing our examiners to more aggressively address the risks of these products during examinations of national banks – at a time, I might add, when home prices were still rising – because we concluded that standards had slipped far enough. That intervention is one reason why you will find few payment-option ARMs in national banks today. Shortly after that, we initiated the interagency process that resulted in the nontraditional mortgage guidance that was issued last Fall.
And from Rushton's written testimony:
[T]he vast majority of subprime loans are not originated in the national banking system or supervised by the OCC. While some national banks and their subsidiaries help to serve the credit needs of the subprime market, their subprime lending last year amounted to less than 10% of the total of subprime mortgage originations by all lenders. ... National banks and their subsidiaries that engage in subprime lending are subject to extensive oversight by OCC examiners and must operate in close compliance with the OCC’s rigorous safety and soundness and consumer protection standards. ... Some have said, perhaps not surprisingly, that there is a direct connection between the rigor of the OCC’s supervision of subprime mortgage lending and the low level of this activity in national banks. Indeed, there have been recent instances in which banks have decided against converting to a national charter for this very reason.
In some ways this is comforting; apparently the national banks engaged in very limited option ARM and subprime lending.