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OCC Bulletin 2019-36 | July 23, 2019

Mortgage Lending: Lending Standards for Asset Dissipation Underwriting


Chief Executive Officers of All National Banks, Federal Savings Associations, and Federal Branches and Agencies; Department and Division Heads; All Examining Personnel; and Other Interested Parties


The Office of the Comptroller of the Currency (OCC) encourages banks1 to offer responsible residential mortgage loans to help meet consumers’ credit needs. The OCC is issuing this bulletin to remind bankers and examiners that real estate and mortgage lending activities are subject to specific regulatory standards and guidelines. Banks originating mortgage loans using asset dissipation underwriting (ADU) should develop and implement policies, processes, and control systems for ADU in a manner consistent with safe and sound banking practices set forth in existing regulations. ADU activities should align with the banks’ overall business plans and strategies. Such strategies could include working with consumers who have a capacity to repay a mortgage loan even though they do not meet traditional income-based underwriting repayment standards.

The OCC expects that banks will offer mortgage loan products in a manner that ensures fair access to financial services and fair treatment of consumers and complies with applicable laws and regulations. This bulletin is consistent with the OCC’s support for responsible innovation by banks to meet the evolving needs of consumers, businesses, and communities.

Note for Community Banks

This guidance applies to all banks engaged in ADU.


For banks offering or considering ADU, the OCC expects bank management to

  • develop and maintain risk governance processes that are commensurate with the credit risk of ADU, particularly if the offering constitutes a deviation from the bank’s existing mortgage lending business activities.2
  • refer to the regulatory real estate and mortgage lending standards and guidelines in 12 CFR 30, 12 CFR 34 (national banks), and 12 CFR 160.101 (FSAs) when developing, implementing, and administering new mortgage underwriting processes such as ADU.


ADU, also known as asset depletion underwriting or asset amortization underwriting, uses an applicant’s assets to calculate a hypothetical cash annuity stream. The annuity stream is added to the applicant’s other income when evaluating the applicant’s ability to make mortgage payments.

ADU is often used to underwrite mortgage loans to high-net-worth applicants who acquire and retain significant liquid assets but do not have sufficient cash flow to qualify for a mortgage under standard income attribution criteria. For mortgages originated for sale to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), lenders are permitted to use ADU to underwrite mortgage loans based on employment-related retirement assets or certain other assets of applicants who are near retirement.3 Mortgage lenders have historically used underwriting policies or selling guide standards that identify eligible transactions; eligible assets; appropriate asset discounts based on quality, liquidity, and accessibility of assets; and asset verification requirements. Prudent ADU generally uses a maximum term for the period of dissipation similar to other residential mortgages and assumes either no rate of return on eligible assets or well-supported rates of return based on asset quality, liquidity, and price volatility.

ADU has existed and been prudently administered for many years. More recently, examiners have identified greater use of ADU that is not supported by risk management practices commensurate with ADU credit risk. A common concern is that a banks’ practices do not sufficiently consider existing regulatory standards and guidelines for real estate and mortgage lending activities.

This bulletin reminds bankers and examiners that real estate and mortgage lending activities are subject to specific regulatory standards and guidelines. Consistent with all forms of real estate and mortgage lending activities, examiners should evaluate ADU against the following existing safety and soundness standards and guidelines.4

Regulatory Real Estate and Mortgage Lending Standards and Guidelines

  • 12 CFR 30, Appendix C

The guidelines in 12 CFR 30, appendix C, “OCC Guidelines Establishing Standards for Residential Mortgage Lending Practices,” are enforceable under section 39 of the Federal Deposit Insurance Act (FDIA), 12 USC 1831p-1, in accordance with the procedures prescribed by 12 CFR 30. Section III, paragraph (B), of appendix C details the expectation that banks prudently consider certain loan terms, conditions, and features when making a mortgage loan. The absence of such consideration in the assessment and documentation of the applicant’s ability to repay the loan in accordance with the loan’s terms poses potential credit and compliance risk. ADU is an alternative process for assessing and documenting an applicant’s ability to repay, and a bank’s practices should reflect appropriate consideration of the terms for eligible loans, the conditions of eligibility for these loans, and features such as annuity income calculations used in these loans.

  • 12 CFR 30, Appendix A, and 12 CFR 160.101, Appendix

The guidelines in 12 CFR 30, appendix A, and 12 CFR 160.101, appendix, “Interagency Guidelines for Real Estate Lending Policies,” are similarly enforceable under section 39 of the FDIA. Section II, paragraph (C), of appendix A details the expectations that banks

  • establish and maintain loan documentation practices that enable informed lending decisions and assess risk on an ongoing basis.
  • identify the purpose of a loan and the source of repayment.
  • assess the ability of the borrower to repay the indebtedness in a timely manner.
  • demonstrate the appropriate administration and monitoring of a loan.
  • take account of the size and complexity of a loan.

The OCC expects bank management to consider these guidelines when granting ADU loans. ADU loans should be readily identifiable in management risk reporting to support and demonstrate appropriate administration and monitoring.

Under section II, paragraph (D), of appendix A, the OCC expects banks to establish and maintain prudent underwriting practices that

  • (1) are commensurate with the types of loans that the bank will make and (2) consider the terms and conditions under which the loans will be made.
  • consider the nature of markets in which loans will be made.
  • provide for consideration, before credit commitment, of the applicant’s overall financial condition and resources, character, and willingness to repay as agreed.
  • establish a system of independent, ongoing credit review and appropriate communication to management and the board.
  • take adequate account of concentrations of credit risk.
  • are appropriate to the size of the bank and the nature and scope of its activities.

The OCC expects bank management to apply these practices to ADU loans.

  • 12 CFR 34, Subpart D, Appendix A

The guidelines in 12 CFR 34, subpart D, appendix A, “Interagency Guidelines for Real Estate Lending,” assist banks in the formulation and maintenance of real estate lending policies that satisfy the requirements of the regulation and are comprehensive, consistent with safe and sound banking, and reviewed and approved by the board at least annually. Under the section titled “Loan Portfolio Management Considerations,” the OCC expects a bank’s policies to

  • identify appropriate terms and conditions by type of real estate loan.
  • establish prudent underwriting standards that are clear and measurable.
  • establish loan origination and approval procedures, both generally and by size and type of loan.
  • require management to monitor the loan portfolio and provide timely and accurate reports to the board.

Under these standards, a bank’s real estate lending policy should address ADU lending to the same level of detail as other real estate lending activities.

Additionally, under the section titled “Underwriting Standards,” the OCC expects prudently underwritten real estate loans to reflect all relevant credit factors, including the overall creditworthiness of the borrower and the capacity of the borrower to adequately service the debt. Lending policies should reflect the level of risk that is acceptable to the board and provide clear and measurable underwriting standards that enable lending staff to evaluate credit factors by type of property for maximum loan amounts, maximum loan maturities, amortization schedules, and loan-to-value limits. ADU mortgage loans should meet these expectations similar to other real estate lending activities.

In summary, reasonable policies and processes specific to ADU should address the following in line with the regulatory real estate lending standards and guidelines and the level of risk presented by the activity:

  • Eligible transactions based on criteria that reflect consideration of relevant credit risk factors in evaluating the borrower’s capacity. Such factors include the probability of default based on credit scores and potential exposure at default or loss given default based on loan-to-value ratios, origination channels, loan purpose, loan amortization, or percentage of income derived from asset dissipation.
  • Eligible assets for use in calculations. Identification could be based on the quality, liquidity, and accessibility of the assets; minimum amounts of assets required; and existing income distributions. Prudent policies also generally identify any prohibited assets.
  • Discounts or adjustments applicable to eligible asset values. Discounts could be based on analysis of the quality, liquidity, and price volatility of the assets, as well as the existence of liens or penalties for accessing the assets before maturity.
  • Verification requirements for eligible assets. Loan documentation should confirm the assets’ ownership, current values, location, and duration of existence.
  • Rates of return applicable to eligible assets or asset classes during the period of the calculation. Policies should be based on supporting analysis and could identify when it is appropriate to assume no rate of return.
  • Asset dissipation periods for income calculations. Policies could be based on analysis that supports the mortgage loan’s actual term, or terms offered for other prudent residential real estate loans.
  • Processes to identify loans approved using ADU for the purpose of monitoring loan performance and tracking ADU mortgage loans sold and retained.
  • Processes for periodic credit reviews, including management and board reporting requirements.
  • Processes to evaluate performance, growth, and concentrations of loans made using ADU.

Further Information

Please contact Steven Jones, Director for Retail Credit Risk, at (202) 649-6220.

Grovetta N. Gardineer
Senior Deputy Comptroller for Bank Supervision Policy

1 “Banks” refers collectively to national banks, federal savings associations (FSA), and federal branches and agencies of foreign banking organizations.

2 Refer to OCC Bulletin 2017-43, “New, Modified, or Expanded Bank Products and Services: Risk Management Principles.”

3 Refer to Fannie Mae, Selling Guide, section B3-3. 1-09, “Other Sources of Income” (December 4, 2018), and Freddie Mac, Single-Family Selling/Servicing Guide, section 5307.1, “Assets as a Basis for Repayment of Obligations” (April 3, 2019).

4 In addition to the safety and soundness standards noted herein, applicable standards include the ability-to-repay provisions contained in 15 USC 1639c and 12 CFR 1026.43. An ADU mortgage loan may meet the standards under these provisions to the extent that the loan is (1) a qualified mortgage (QM) pursuant to the Temporary Exemption QM provisions in 12 CFR 1026.43(e)(3) for loans eligible for purchase or guarantee by Fannie Mae, Freddie Mac, and other governmental entities, (2) a QM pursuant to other provisions of 12 CFR 1026.43(e), (3) a QM as set forth in 15 USC 1639c(b)(2)(F) that is made by an insured depository institution with assets of less than $10 billion, or (4) a loan for which the creditor has made reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms, as defined in 12 CFR 1026.43(c) and related commentary that provides guidance on what constitutes reasonableness and good faith. (12 CFR 1026.43)