Member Guidance for Onsite Collateral Verification

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1 Member Guidance for Onsite Collateral Verification Workflow Arrangements The FHLB Analyst will need a workspace sufficient to accommodate a laptop computer with access to an electrical power source and adequate space to review loan files. All required loan files should be pulled and ready for review upon Analyst s arrival (if hardcopy files). If loan files are imaged, Analyst access to your imaging system should be in place at time of arrival. Photocopied or imaged documents are acceptable with the exception of the promissory Note. The original promissory Note is required for each loan reviewed. Further details regarding our Note requirements are listed in items # 5 10 below. Throughout the review process, the Analyst will provide to your designated personnel status reports of findings. While the Analyst is onsite at your location, additional documentation or information can be supplied for consideration in response to the findings. Post-review submission of documentation is typically not allowed. The FHLB Analyst will schedule and conduct an exit meeting with your designated personnel and provide the preliminary review results. Final results of the onsite verification review will be provided after the review report is reviewed by FHLB management and quality audit. Documents Required Through the SecureConnect website, you will be provided the list of loans to be sampled during the onsite review. In addition to the following requirements, each sample loan file will be reviewed for FHLB eligibility based on the Ineligible Collateral list provided with this packet. For sample loans which have been paid in full, we will select available replacement loans. For sample 1-4 family residential mortgage loans identified as Held for Sale which have been delivered to an investor, our process will include the substitution of a comparable Held for Sale loan. Full clarification of our replacement and substitution process will be provided by the assigned Analyst prior to the onsite review. REAL ESTATE COLLATERAL 1) The loans securing your blanket lien must be properly coded per the Call Report guidelines based on the underlying collateral. 2) One-to-four family and multifamily residential loans must be fully disbursed, whole, first mortgage loans owned by the Member with no participating or retaining interest. (One-to-four family and multifamily loan Participations may be eligible if an FHLB-Dallas approved Affiliate Agreement is in place.) 3) Commercial, agricultural, land and construction loans may be wholly owned or a retained portion of a participation loan. The Member bank must be the holder in due course and be in possession of the original Note. (Purchased participations without possession of the original Note may be eligible if an FHLB-Dallas approved Affiliate Agreement is in place.) 4) 1-4 family residential junior liens (home equity, home improvement or purchase money second) are acceptable collateral if the subject loan is in second lien position behind the Member s first lien. Nonresidential junior liens are acceptable collateral if the subject loan is in second lien position behind the Member s first lien. (This collateral type is available only for Banks and Thrifts and must be reported in the appropriate RCON.) 2 5) For each sample loan selected for review, the original inked-signature paper Promissory Note must be provided. If the Note was executed using a Power of Attorney, the original POA or copy of the recorded POA must be provided.

2 6) Notes signed electronically or bearing facsimile signatures are not eligible for FHLB Dallas. 7) A Lost Note Affidavit in lieu of the original paper promissory Note is not acceptable. 8) For 1-4 family residential mortgage loans identified as Held for Sale, an FHLB-approved Bailee letter is acceptable in lieu of the original promissory Note. 9) If a Note was not originated by your bank, the complete chain of endorsements must be verified. 10) If the sample loan Note matured within the 30-day period prior to the date the onsite review is being conducted, no exception will be taken for the maturity date. If the Note matured more than 30 days prior to the date the onsite review is being conducted, the loan will be ineligible in the onsite review. Exceptions to this policy are considered on a case basis. 11) The recorded deed of trust/mortgage (a copy of the recorded document is acceptable) is required to verify the original loan amount and borrower name(s) match the Note and that the property legal description matches other loan documents. 12) Recorded copies or original documents of any renewals, extensions or modifications are required. 13) Assignment of Rents and Leases (filed of record or included in the Deed of Trust/Mortgage) is required for multifamily and commercial income-producing properties. 14) Title Policy or Final Attorney s Opinion of Title: Title insurance in an amount sufficient to cover the current unpaid principal balance is required. The legal description on the Deed of Trust/Mortgage must match the final title policy or attorney s final opinion of title. The final title policy or attorney s final opinion must show the Member is in first lien position. The loan being reviewed must also be in a first lien position if it is coded as a first lien per the Call Report instructions. A commitment for title insurance, title search, preliminary title report or an attorney s preliminary title opinion will be accepted if the subject loan closed within the previous 60 days prior to the onsite review date, subject to the following conditions: a title search or preliminary report indicates the Member will be in first lien position the HUD-1 Settlement Statement confirms the purchase of the mortgagee title policy. Endorsements providing extended coverage to the title policy or an updated attorney s opinion are required for additional funds disbursed on a renewal and extension. Residential Loans without a Title Policy or Attorne y s Final Opinion of Title: Residential First Mortgage loans for the purpose of refinance, home improvement or home equity loans without a final Title Policy or attorney s Final Opinion of Title will be considered an exception in the Onsite Verification; however, a Member may receive value for these loans on a Listing basis if the loans meet the following criteria: a. The loan is reported on Call Report lines RCON 5367 or CU703 b. The original loan amount was $100,000 or less c. A title search confirms the Member is in first lien position d. Listed loans will be sampled as part of the Onsite Collateral Verification process e. Loans must meet FHLB documentation requirements, including the title search f. The loans are to be listed and reported monthly with FHLB Dallas according to the Collateral Vault Listing Procedures. 15) Private Transfer Fee purchase transaction loans originated after February 8, 2011 contained in the 1-4 family and multifamily samples are examined during the onsite review for evidence of Private Transfer Fee. Loans determined as encumbered by a Private Transfer Fee will be an exception in the onsite review. 3

3 16) Fire & Hazard insurance policy must be current for loans secured by improved real estate. The Member must be listed as the additional insured or loss payee and the amount of coverage should be equal to or greater than the unpaid principal balance. However, FHLB Dallas will accept an amount equal to the lesser of the Sales Price or Appraised Value minus the land value. Also, if the insurable value of the improvements (as determined by the property insurer) is less than the unpaid principal balance, the insurable value is the amount of coverage required. (Note: a review of each insurance policy is not required if a Blanket Forced Place Insurance Policy is in effect.) 17) Flood insurance (if the improved real estate collateral property is located in a Special Flood Hazard Area) is required and the Member must be listed as the additional insured. The amount of flood insurance should be the lesser of a) the unpaid principal balance of the mortgage or b) the maximum insurance available from the National Flood Insurance Program (NFIP). 18) Real Estate Valuation Requirements we will verify the collateral value is equal to or greater than the current unpaid principal balance as follows: Loans with an original loan amount less than $100,000, valuation may be based on an insurance policy, sales contract, broker s opinion or written opinion of value from Member staff (see ** below for further details) Loans with an original loan amount equal to $100,000 and less than $250,000 are required to have an appraisal/valuation in file and may be performed by Member staff (see ** below for further details) Loans with an original loan amount equal to or greater than $250,000 require a full appraisal that conforms to FIRREA and USPAP standards (see ** below for further details) **Residential mortgage loans originated on or after 1/10/2014 and secured by a principal dwelling will be reviewed for compliance with CFPB ruling relative to appraisal requirements for higher-risk mortgages, as follows: Higher Risk Mortgage Determination: a. First lien conforming loan amount: APR exceeds Average Prime Offer Rate by 1.5% or more b. First lien non-conforming loan amount: APR exceeds the Average Prime Offer Rate by 2.5% or more c. Second lien: APR exceeds Average Prime Offer Rate by 3.5% or more Appraisal Requirements for Higher-Risk Mortgages: a. Appraisal must be written appraisal performed by a certified or licensed appraiser and includes interior inspection of subject property b. Notice must be provided to Borrower at application confirming Borrower will receive a copy of the subject appraisal c. Additional appraisal from a different appraiser is required if the property is being re-sold at a higher price within 180 days of its previous sale Conforming loan limits: 1-unit residential $417,000; 2-unit residential $533,850; 3-unit residential $645,300; 4-unit residential $801,950) 19) Property Assessed Clean Energy (PACE) liens for 1-4 family, multifamily and commercial real estate sample loans, the property zip code will be compared to a PACE jurisdiction database. For any zip code match, FHLB will require a copy of the current tax statement or a tax certification. Sample loans with a PACE lien will be considered an exception if: the PACE lien is superior to the mortgage pledged to FHLB and the combined loan-to-value of the mortgage pledged to FHLB plus unpaid balance of the PACE lien exceeds 100% of the current appraised value, or the PACE loan balance cannot be determined. 20) If the loan is an FHA loan or a VA loan, the FHA Mortgage Insurance Certificate or VA Loan Guaranty Certificate (as applicable) is required. For conventional loans insured 4 with private mortgage insurance, evidence of the mortgage insurance is required.

4 21) Small Business Administration Guaranteed Loans are eligible if the underlying collateral appraised value is equal to or greater than the subject loan s unpaid principal balance. No value is ascribed to the SBA Guarantee. 22) Anti-Predatory Lending (APL) and HOEPA sampled single-family residential mortgage loans reported in RCON5367, RCON1797, RCON5368, CU703 and CU386 as further defined below, and closed in the name of natural borrowers will be reviewed for compliance with Anti-Predatory Lending (APL) and Home Ownership and Equity Protection Act (HOEPA). Loans closed in the name of a business entity or trust are excluded from our APL and HOEPA review. FHLB Dallas will apply APL and HOEPA tests according to the subject loan origination date, as described here: Loans originated prior to January 10, 2014: Applicable transaction type --principal residence, refinance, closed-end credit, first lien or second lien Exempt transaction types --purchase transactions --construction loans --open-end home equity lines of credit --reverse mortgages --non-principal residences APR & Fees test for applicable loans originated prior to January 10, 2014: --for a first lien, APR must not exceed by more than 8 percentage points the rates on comparable maturity Treasury securities --for a second lien, APR must not exceed by more than 10 percentage points the rates on Comparable maturity Treasury securities --total fees and points paid by the Borrower must not exceed the greater of $625, adjusted for inflation, or 8 percent of the loan amount. (Exception for Texas Home Equity Section 50(a)6 loans: applicable fees and points paid by the Borrower must not exceed 3 percent of the loan amount) APL test for applicable loans originated prior to January 10, loans containing mandatory arbitration clauses with respect to dispute resolution are ineligible for FHLB Dallas (unless such arbitration provisions are allowed by state law) --loans that require prepayment penalties for early payoff beyond the first five years of the loan are ineligible for FHLB Dallas --loans that require the Borrower to obtain prepaid, single premium credit life or similar insurance are ineligible for FHLB Dallas Loans with applications taken on or after 1/10/2014: Applicable transaction types --principal residence purchase, first or second lien --principal residence refinance, first or second lien --principal residence closed-end home equity loan --principal residence open-end home equity line of credit Exempt transaction types --construction loans (new construction only; not remodel or improvements) --reverse mortgages --non-principal residences (rental, vacation or second home) --Loans originated and directly financed by a Housing Finance Agency (HFA) --Loans originated under USDA s Rural Development Section 502 Direct Loan Program APR test: Applicable loans with applications taken after 1/10/2014 will be tested utilizing the Average Prime Offer Rate (APOR) index and the following revised guidelines 5 for determining compliance with HOEPA. The 2014 revised HOEPA rule provides that a transaction is a high-cost mortgage if:

5 a. the APR exceeds the APOR by more than 6.5% for first liens of $50,000 or more; b. the APR exceeds the APOR by more than 8.5% for first liens less than $50,000; c. the APR exceeds the APOR by more than 8.5% for second lien transactions; d. points and fees exceed 5% for loans of $20,391 or more; or points and fees exceed lesser or 8% or $1,000 for loans less than $20,391 (Exception for Texas Home Equity Section 50(a)6 loans: applicable fees and points paid by the Borrower must not exeed 3 percent of the loan amount) High-cost mortgages as defined above are ineligible collateral for FHLB Dallas. APL test: Applicable loans with applications taken after 1/10/2014 are ineligible collateral for FHLB Dallas if any of the following loan characteristics apply: a. Mandatory arbitration clause with respect to dispute resolution b. Prepayment penalty for early payoff beyond the first three years of the loan c. Mandatory prepaid, single-premium credit life or similar insurance d. Financing of single-premium credit life insurance premiums (required or voluntary) or similar insurance into the subject loan amount 23) Interagency Guidance for Subprime and Nontraditional Lending: in the Single Family sample, one-to-four family residential mortgage loans originated or acquired after July 10, 2007 will be reviewed for compliance with Interagency Guidance on Nontraditional Mortgage Product Risks published in the Federal Register October 4, 2006 and Statement on Subprime Mortgage Lending published in the Federal Register July 10, Interagency Guidance review will apply only to loans closed to natural persons. Loans closed in the name of a business or trust are excluded from FHLB-Dallas Interagency Guidance review. Our Interagency Guidance review will encompass: Loan-to-Value LTV will be calculated on the sum of the original loan amount and any concurrent secondary financing, divided by the appraised value as of the origination date. Loan application and loan approval document required to determine occupancy status of the collateral property and the loan purpose. These documents should also indicate the qualifying rate. ARM disclosures when applicable, loan file must evidence proper ARM disclosure. Any of the following items in file pertaining to verification of Borrower s income and employment: paystubs, W-2 forms, personal or business tax returns, personal bank statements, written Verification of Employment (VOE), etc. Bank statements or other asset documentation used to verify sufficient funds to close (per HUD-1) and reasonable reserves as of the origination date. Debt-to-Income Ratio based on the borrower s total monthly debt payments divided by gross stable monthly income at time of loan origination. Borrower s Credit using the credit report that was relied on to make the loan, we will review for credit score and overall credit history performance. Community Lending or Affordable Housing Initiatives if applicable, information regarding the community lending program is required. 24) Mortgage Pay History the most recent 12 months pay history is required for all loans in the Single Family, Multifamily, Commercial Real Estate and Home Equity samples. 25) Debt Service Coverage Ratio (DSCR): for multifamily or commercial income-producing property with unpaid principal balance of $1million or greater, minimum DSCR of 1.05 is required. 26) For all loans sampled, maximum loan-to-value is 100% based on current unpaid principal balance divided by the most recent appraised value. 6

6 NON-REAL ESTATE COLLATERAL (available only for Community Financial Institutions): 1) For each loan selected for sample review, the original Promissory Note must be provided. (If the Note was executed using a Power of Attorney the file must include the original POA or copy of the recorded POA). Notes signed electronically are not eligible for FHLB-Dallas at this time. (If a Note was not originated by your bank, the complete chain of endorsements must be verified.) 2) The Collateral Pledge/Security Agreement must identify the Collateral and contain the signature of the borrower(s). 3) The appraisal/valuation statement should identify the pledged collateral and provide a value of the pledged assets that is equal to or greater than the loan balance. All loans must be fully secured by eligible collateral. 4) UCC-1 filings must be properly filed in the state where the borrower is located (if borrower is an individual). If loan is in the name of a non-registered organization (general partnership, trust or association) the UCC is filed in the state where the business is located. For registered organizations (corporations, LLC s and Limited Partnerships) the UCC is filed in the state of organization/incorporation. The UCC-1 filing must be current (UCC filings are valid for five years) and specifically identified. 5) Vehicles The Member must hold the original and be the first lien-holder on all vehicle titles. The value of the vehicle must be equal to or greater than the loan balance. Aircraft verification procedures: Original Promissory Note -- Aircraft The borrower s exact legal name, the loan amount, the loan term and the original signature (the signature must be in ink) must be reviewed. Additionally, the borrower s name must be the same used in the Security Agreement, UCC, and Aircraft Title. The name must be exactly the same on all documents and must be the exact legal name of the borrower (no abbreviations or trade names). Security Agreement -- Aircraft The Aircraft Security Agreement form (AC ) or its equivalent must have the Borrower s exact legal name and must be the same legal name as on the note. This Aircraft Security Agreement must be filed/recorded with FAA (can be determined by reviewing final Title report or by obtaining a copy of a Conveyance Recordation Notice, AC Form , which is sent to the secured party once a security agreement is recorded). The Conveyance Recordation Notice, AC Form , describes the affected aircraft, engines, propellers, spare parts, and other eligible collateral, the recorded document by its date, the parties, the FAA recording number, and the date of recordation. The Borrower must be the registered owner of the aircraft as evidenced by documents on file with the FAA Aircraft Registry. If the aircraft is owned by two or more persons as co-owners, each person who shares title to the aircraft must sign all instruments relating to the aircraft. If the aircraft is owned by a partnership, the names of all general partners must be stated with the partnership name, but one partner may sign instruments for the partnership if the full partnership name is shown and the title partner follows their signature. The collateral description must include: a. Aircraft manufacturer and model number b. Aircraft serial number c. Aircraft registration number d. Year manufactured 7 e. Make Manufacturer and model and horsepower (or its equivalent) of engine(s) and propeller(s) (ex. 1,876 lbs. thrust is equivalent to 750 horsepower)

7 UCC Requirements Aircraft f. Engine(s) and propeller(s) serial number(s) g. Detailed description of avionics (if applicable) h. Registration Number-USA registry only i. Statement that spare parts are being maintained by, or for, an air carrier certificated under 49 USC and the name of the air carrier j. Specific location or locations of the spare parts k. Description of proceeds, including, without limitation, insurance proceeds The UCC-1 or Continuation must be filed at the debtor s location and for extra precaution in the state(s) where the aircraft is based and primarily used, and should be dated within the last five years. The UCC-1 must describe: Title Requirements -- Aircraft a. Aircraft manufacturer and model number b. Aircraft serial number c. Aircraft registration number d. Year manufactured e. Make Manufacturer and model and horsepower (or its equivalent) of engine(s)and propeller(s) (ex. 1,875 lbs. thrust is equivalent to 750 horsepower) f. Engine(s) and propeller(s) serial number(s) g. Detailed description of avionics (if applicable) h. Registration Number-USA registry only i. Statement that spare parts are being maintained by, or for, an air carrier certificated under 49 USC and the name of the air carrier j. Specific location or locations of the spare parts k. Description of proceeds, including, without limitation, insurance proceeds The Final Title opinion must be reviewed to verify a perfected superior lien in favor of the lender (Member bank). AC Form , Title Search Companies, lists title search companies specializing in aircraft title and records review. This document must show: The owner is the same exact legal name as is on the note and Aircraft Security Agreement If a Bill of Sale is used rather that an Aircraft Security Agreement, it must be filed/recorded with the FAA. Aircraft must be registered in the United States. 8

8 Appraisal Requirements -- Aircraft Appraisals must be prepared by a third party (not by lender). The value of the collateral must be equal to or greater than the loan balance. The Appraisal should contain detailed examination of airframe, engines, props, instrumentation, avionics and all relative systems. In-depth review of aircraft log books, airworthiness directives, inspection status, service release forms, time critical components (total airframe hours and cycles and total time on engines), and other pertinent data. Analysis of aircraft make and model, installed equipment, avionics, condition of exterior and interior, age of engines (date of and time since last engine overhaul and description of maintenance program (if applicable) and other life limited components. Insurance Requirements for Aircraft Loans Hull Insurance. Hull All Risks Insurance covering engines and spare parts while on or off the aircraft, at either agreed value (amount to be not less than the loan balance) or replacement cost value is required. Lender should be named as the sole loss payee. Liability Insurance. Comprehensive Aviation Liability insurance, including passenger liability is required. The Lender (Member bank) must be named as an additional insured or loss payee. General. A Breach of Warranty clause must be included (this allows the Lender to recover from a loss if the customer somehow breaches his policy causing it to be null and void) The insurance coverage must be in effect and the amount of the insurance must be equal to or greater than the loan balance. Complex Loans: Marine Ships and unusual and/or complex collateral are accepted on a case by case basis. Contact the collateral department for specific requirements Additional instructions for Louisiana (LA) Loans secured by Real Estate In addition to other applicable loan verification instructions, the following loan verification instructions are to be used for mortgages securing RE in LA. Special Mortgages, Collateral Mortgages, or a Multiple Indebtedness Mortgages/Mortgage to Secure Future Advances. If the mortgage is classified as a Special Mortgage the following is required: 1) The promissory note must be the original promissory note identified in the special mortgage and not a renewal of the promissory note identified in the special mortgage. 2) The Special Mortgage must be recorded and identify the property used as security. 3) The Title Insurance Policy or Attorney s Opinion of Title must indicate that the Member bank is in the first lien position; the legal description must be the same as the legal on the Special Mortgage. Lien searches of Mortgage Certificates issued through the Parish clerk are not acceptable. A Commitment for Title Insurance or Preliminary Attorney's Opinion of Title may be acceptable if the loan has closed within the previous 180 days. 4) Note: The borrower should not have paid down the promissory note identified in the special mortgage and then re-borrowed under the same promissory note. 9

9 If the mortgage is classified as Collateral Mortgage the following is required: 1) The original hand note (the promissory note which is not the collateral mortgage note) must contain the following terms: (i) the principal amount of the debt; (ii) the interest rate; (iii) the repayment terms; and (iv) the maturity date. If there is more than one "hand note", verify that the "hand note" with the most recent date recited on the face or reverse of the note that the note is secured by the pledge of the collateral note. 2) The original Collateral Mortgage must be recorded and identify the property used as security. 3) The Collateral Mortgage Note amount (this establishes the upper limit of the loan amount that can be borrowed) must be greater than the unpaid loan balance. 4) The Title Policy or Attorney s Opinion must indicate (i.) the Member bank is named as the insured, (ii) the mortgage recording information is the same as the recording information on the mortgage (iii) the legal description is the same as on the collateral mortgage (iv) the member is in first lien position and no prior liens are indicated. 5) The original Collateral Pledge/Security Agreement must identify the Collateral Mortgage note in the loan file and it must have language that secures future advances. 6) Loans assigned to the Member bank: The collateral mortgage note, the collateral mortgage, the "hand note", and the collateral pledge agreement must have been assigned to the Member bank, (i) the collateral pledge agreement must contain assignment language and language stating that the loans made by a successor or assignee will be secured by the pledge of the collateral mortgage note, and (ii) the collateral mortgage must say that the owner-mortgagor desires to be indebted to future holders and that the mortgagor declares and acknowledges a debt to future holders. 7) The collateral mortgage note must contain "Ne Varietur" language and the accompanying signature (this is similar to having a document notarized). 8) The collateral mortgage must be dated within 10 years of the date of the recording of the collateral mortgage or a continuation (Reinscription) of the collateral mortgage is required. If the mortgage is classified as a Multiple Indebtedness Mortgage/Mortgage to Secure Future Advances, the following is required. 1) The multiple indebtedness mortgage/mortgage to secure future advances are subject to the same inscription rules as other types of mortgages. Recordation of the mortgage ceases 10 years after the date of the instrument unless the mortgage describes the maturity date of any obligation secured by the mortgage and if any part of the described obligation matures nine years or more after the date of the instrument. In that case, the effect of recordation ceases 6 years after the latest maturity date described in the instrument. When applicable, evidence of continuation of the multiple indebtedness mortgage/mortgage to secure future advances must be in the loan file. This continuation must extend the date of the multiple indebtedness mortgage/mortgage to secure future advances beyond the date the loan verification is being performed. 2) The Multiple Indebtedness Mortgage must be recorded. 3) The Title Policy must contain a Multiple Indebtedness endorsement, or the Attorney's Opinion must acknowledge the Multiple Indebtedness Mortgage. 4) The mortgage should expressly provide that it secures obligations that may arise in the future, i.e., obligations now existing or thereafter arising. 5) The mortgage must state the maximum amount of the obligations that may be outstanding at any time and from time to time that the mortgage secures. This amount may be much greater than the actual debt. 1 6) All loans secured by a Multiple Indebtedness Mortgage must be reviewed to ensure there is sufficient collateral to fully secure all the loans; if not, the loan will be considered as ineligible.