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    OCC Bulletin Outlines Risk Management Principles for Loan Purchases

    September 10, 2020

    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

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