What is a qualified collateral report verification review and why is it necessary?
A qualified collateral report verification is an initial, abbreviated on-site review of Category-1 members' QCR reporting, conducted by the Bank's collateral staff. The review generally includes an assessment of 100 randomly selected loans from the total QCR pledge.
The purpose of the QCR verification is twofold. First, we determine the accuracy of the member's QCR pledge of one-to-four family loans and ensure that all extensions of credit from the Bank are adequately collateralized. Second, we provide the member with information regarding the Bank's pledging and eligibility guidelines to better prepare them for a full member collateral review that will be scheduled after the QCR verification.
The QCR requires Category-1 members to separately identify pledged loans with FICO scores of less than 661 and nontraditional loans with deferred principal payments. The valuation for low FICO loans reported on the QCR is the standard 60 percent, and the valuation for nontraditional loans is the standard 65 percent. In contrast, the standard valuation for conventional loans is 75 percent.
Can the QCR verification potentially affect a member's borrowing capacity?
Yes: If the QCR verification determines that the member's QCR pledge is overstated, the Bank will require the member to submit a new QCR to account for the inaccuracies identified during the verification. Correcting an overstatement of pledged collateral would reduce the member's borrowing capacity. For example, if the verification determines that 9 percent of the sample has FICO scores less than 661, and the member is reporting zero in this category on the QCR, the member will be required to move 9 percent of the total one-to-four family owner-occupied pledge to the low FICO category and submit a new QCR. The low FICO loans will receive the lower (60 percent) valuation. The same holds true for incorrectly reported nontraditional loans in the QCR pledge.
What is a member collateral review and why is it necessary?
A member collateral review is a periodic on-site review of the member's pledged one-to-four family loans by the Bank's collateral staff. The review generally includes an assessment of 50 randomly selected loans from the member's pledged one-to-four family portfolio. It is more extensive than the brief QCR review.
Its primary purpose is to determine the accuracy, eligibility, and credit-risk profile of the member's pledged one-to-four family loan collateral. On-site collateral reviews help ensure that all extensions of credit from the Bank are adequately collateralized. They also provide members with valuable information regarding the Bank's pledging and eligibility guidelines to help them maximize their collateral value.
What is a collateral adjustment factor and how does it affect members' borrowing capacity?
A collateral adjustment factor is the discount the Bank applies to a member's loan pledge to adjust for ineligible loans found during the member collateral review. The adjustment percentage is derived from the collateral review exception rate, which is based on the number of ineligible loans found during a member collateral review.
Do all member collateral reviews result in a collateral adjustment factor?
No: A collateral adjustment factor is only applied if the member collateral review determines that the member has overstated their pledged collateral by including ineligible loans.
Can a member reduce its collateral adjustment factor after the member collateral review is completed?
Yes: The collateral review staff may determine that a reduced collateral adjustment factor is warranted provided the member can identify and remove ineligible loan types found during the member collateral review.
The member must provide supporting documentation and a signed letter stating that the ineligible loans have been removed from the pledge. In addition, Category-1 members will be required to submit a new QCR. Category-2 and Category-3 members will be required to provide a new loan listing.
A member may also request a follow-up member collateral review, which will require advance notice and be scheduled based on available resources.
How does the Bank's residential loan credit-risk model used for valuation purposes work? Which loan attributes have the most impact on the model's assessment of the credit risk within a portfolio?
The Bank uses a third-party loss-estimation model to determine the credit risk associated with a member's residential loan collateral pledge. The model calculates potential losses, defaults, and loss severities (loss given default) within a portfolio based on the loan-level characteristics and economic factors, such as house-price movements.
The most important loan-level characteristics are FICO score; original and adjusted loan-to-value ratios; location and occupancy; loan type; loan purpose; documentation type; property type; debt-to-income ratio; appraisal type; asset verification; and payment history. The model adjusts loan-to-value ratio based on the most recent FHFA house-price index.
How does the model affect a member's collateral valuation relative to the standard valuation(s)?
The credit-risk model is used to determine the Bank's standard (weighted average) valuations that are applied to one-to-four family owner-occupied residential loans pledged by Category-1 members that do not provide loan-level data for these pledged loans. The standard valuations are 75 percent for conventional loans, 65 percent for nontraditional loans, and 60 percent for low FICO score loans. The standard valuations are derived from the weighted average credit risk of loans for which the Bank has loan-level information, including data from member collateral reviews.
Category-2 and Category-3 members are required to provide a loan-level listing of their pledged loans. This information is run through the model. In cases where the model shows a higher level of credit risk in the pledge than the Bank's standard valuation, the difference reduces the valuation of the individual member's portfolio.
If the credit-risk model indicates that the credit risk of a member's pledged loans is less than the standard, will the member's valuation be increased?
Yes: Category-1 members that choose to provide a loan-level listing of their pledged loans may receive a higher valuation than the standard valuations for one-to-four family owner-occupied loans.
Is a collateral adjustment factor applied at the conclusion of a QCR verification review?
Generally, no. In most cases, there is no collateral adjustment factor applied after a QCR verification. However, a substantial overstatement of pledged collateral could require some sort of collateral adjustment factor until the Bank's staff can return for a follow-up review.
How can a member assure more accurate reporting of its low FICO score loans on the QCR?
A member generally has three options:
- If available, utilize FICO scores from internal data systems.
- If currently unavailable, perform a scrub of the pledged loan credit files to collect and electronically store FICO scores.
- Obtain soft hit or refreshed FICO scores electronically from any of the major credit bureaus, and load into its servicing system.
What are the most common types of ineligible loan collateral found during on-site one-to-four family, owner-occupied, member collateral reviews and QCR verifications?
The types of loans that are commonly incorrectly reported in the eligible one-to-four family, owner-occupied category include:
- Second homes/investment properties;
- Construction-to-permanent loans with the final inspection and/or certificate of occupancy missing;
- Employee loans;
- Manufactured homes;
- Loans with current loan-to-value ratios greater than 90 percent without private mortgage insurance;
- Land-only loans; and
- Loans in junior-lien positions
Other less common ineligible loan types sometimes found in the eligible one-to-four family, owner-occupied category include:
- Sold loans where the member has retained servicing;
- Commercial loans;
- Auto loans;
- Loans with substandard credit and chronic delinquency; and
- Loans secured by properties in poor condition.
What will the FHLB Boston review staff need while they are on-site?
The collateral staff will need workspace sufficient to accommodate a laptop computer with access to an electrical power source, adequate work space in which to perform the review, and immediate access to all requested loan files, reports, etc. All required loan files should be pulled and ready for review upon the collateral staff's arrival. The majority of information for the loan file review will be contained in the credit and collateral files. Additional items may be requested as the need arises.
For more information, contact the Collateral Department.