Banks are facing tougher examinations of their residential lending activities this year.
The Office of the Comptroller of the Currency said it adopted new procedures recently in response to banks' rapid expansion into mortgage banking in the last few years.
A new handbook "will help mortgage bankers - and those considering entering this highly competitive business - become more aware of the responsibilities, opportunities, and challenges inherent in this activity," said Comptroller Eugene A. Ludwig.
The office recently completed drafting the formal procedures for the detailed exams - its first ever for mortgages.
"As national banks got into mortgage banking more and more, we decided we needed a formal set of standards," said a senior examiner who worked on the measures. "It's an important area so we feel we have to pay close attention to it."
Starting this month, examiners will use the 123-page handbook to evaluate all mortgage activities, from originations to secondary marketing, to make sure they are up to standard. To make determinations, examiners will scrutinize policies, records, and managers.
Clearly, lenders will have to get up to speed on the handbook's contents as well. But mortgage bankers said the new procedures could heighten the industry's professionalism. "The sophistication and execution of individual organizations are going to have to be much better defined," said Patrick S. Flood, president of HomeBanc Mortgage Corp., a unit of First Tennessee Bank.
With the handbook, the Office of the Comptroller is replacing an ad hoc approach in which mortgage operations were reviewed by examiners according to their levels of knowledge.
As a result of the change, "We will be more consistent in the way we examine mortgage banking activities," the senior examiner said.
Procedures for resolving problems or violations that mortgage exams turn up remain the same. The remedies range from crafting agreements with management to issuing cease-and-desist orders and fines.
To further promote standardization of exams, the Office of the Comptroller will hold mortgage classes, starting with a group of 40 examiners in September.
Industry experts said the move by the Office of the Comptroller, while not adding new areas for examiners to scrutinize, does for the first time present a systematic and comprehensive approach.
"This will provide another level of review to see if mortgage companies are complying," said Larry Platt, who practices mortgage law as a partner with Kirkpatrick & Lockhart, Washington, D.C.
Mortgage bankers are girding for the exams they now face under the new procedures.
HomeBanc will conduct reviews "to make sure the 123-page document and practices to mitigate risk are well understood by people in the organization," Mr. Flood said.
J. William Johnson, chairman of First National Bank of Long Island, said the procedures would go a long way toward preventing subjective, and potentially inconsistent, evaluations by different examiners.
"The standardization has appeal," Mr. Johnson said. "We'll be able to look at the handbook and understand how we're being judged."
The handbook requires examiners to look at risk areas, business strategies, lines of authority, and financial objectives.
"Because mortgage banking encompasses numerous activities that pose significant risks, the bank should have effective policies and strong internal controls governing each operational area," the handbook states.