OCC issued Bulletin 2020-81 to inform banks about sound risk management principles regarding loan purchase activities. The key topics covered in the bulletin regarding loan purchase activities of a bank include strategic plan and risk appetite, lending policies and procedures, credit administration, due diligence and independent credit analysis, additional considerations for loan portfolio and pool purchases, and recourse arrangements. OCC expects banks to engage in loan purchase activities safely and soundly and in compliance with the applicable accounting standards, laws, and regulations.
Commercial and retail loan purchase activities include purchasing whole loans, loan pools, loan portfolios, loan participations, or participations in syndicated loans from other banks or nonbank lenders. Lending activities, including loan purchase activities, are subject to certain regulatory standards and long-standing risk management guidelines. Loan purchase activities should align with the strategic plans of banks and must be supported by sound risk management systems. Failure to engage in sound risk management of loan purchase activities can subject banks to unwarranted risks such as elevated loan losses, increased legal expenses, and noncompliance with safety and soundness standards. Loan purchase activities of a bank would typically be handled in a manner consistent with its other lending activities, including sound risk management commensurate with the bank's size, complexity, and risk profile. As per the OCC Bulletin, sound risk management of loan purchase activities generally include:
- A well-defined strategic plan and risk appetite that appropriately cover loan purchase activities
- Risk limits for loan purchase activities
- Policies and procedures governing loan purchase activities
- Underwriting analysis and due diligence of the loans and independent of analysis provided by the selling institution (referred to as the seller), before purchase
- Agreement by the borrower(s) to make full and timely credit information available to the seller or the underwriting institution
- Agreement by the seller to provide the purchaser with necessary information to make an informed credit decision and conduct ongoing credit monitoring
- Written documentation of transfer, servicing, events of default, collections, and recourse arrangements outlining the rights and obligations of each party
- Effective credit administration practices, including management and board reports
Related Link: Bulletin 2020-81
Keywords: Americas, US, Banking, Credit Risk, Loan Purchase Activity, Strategic Plan, Bulletin 2020-81, OCC
Previous ArticleEBA Responds to EC Call for Advice to Strengthen AML/CFT Framework
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.