ALEXANDRIA, Va. — The NCUA has issued a letter to credit unions emphasizing the need to carefully examine their use of mortgage brokers and correspondents.
It's the second time in a year that the regulator has issued such as a warning.
"Recently, there have been a few highly publicized losses from credit unions failing. In those cases a mortgage broker or correspondent was involved. The purpose of the letter is to bring special attention to those relationships and to emphasize the due diligence that is needed [when] entering into and managing such relationships," an NCUA spokesperson told Credit Union Times.
Comprehensive due diligence on such originators before taking on their loans is a must, the NCUA warned in Letter 08-CU-19, dated August 2008.
And, once the business relationship is established, credit unions should put into place audit procedures and controls to verify that fees paid to third parties are legitimate, mortgage applications are complete and referral fees do not violate RESPA prohibitions against kickbacks.
The quality of loans should also be monitored so that credit unions can stay on top of defaults, the NCUA said.
Reserve the right not to purchase or to be able to send back to the broker or correspondent, any loans that do not comply with its standards, the NCUA's letter added.
The August letter also told credit unions to watch out for issues that could be detrimental to credit unions, such as prepayment penalties. Under federal law, federal credit unions cannot impose prepayment penalties on loans they grant or enforce a prepayment penalty that may exist in a loan contract in which it participates or purchases. The penalty is a popular feature in subprime loans. State law determines whether loan prepayment penalties are allowed for state-chartered credit unions.
"Over the past several months there has been press coverage regarding the inability for mortgage holders to refinance in some situations due to the burden of prepayment penalties. Prepayment penalties can apply to any loan, not just subprime. There are states that allow prepayment penalties on mortgage loans; and, credit unions need to be mindful of the pros and cons of adding prepayment penalties or purchasing or participating in loans that may contain prepayment penalties," an NCUA spokesperson explained.
Loans with predatory terms should be avoided as they could lead to significant legal and reputational risk for credit unions, the NCUA said.
Loan sampling should be undertaken so as to check for compliance with policies, regulations and written agreements.
The NCUA also advised that if ongoing credit or documentation problems are discovered, the credit union should modify the contract terms or terminate the business relationship.
–burdenlisa@yahoo.com
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