One- to Four-Family Residential Real Estate Lending. The Bank originates and services
one- to four-family loans that are not guaranteed or insured by the federal government,
and purchases one- to four-family loans, on a loan-by-loan basis, from a select
group of correspondent lenders.
Originated loans
While the Bank originates both fixed- and adjustable-rate loans, our origination
volume is dependent upon customer demand for loans in our market areas. Demand
is affected by the local housing market, competition, and the interest rate
environment.
Purchased loans
The Bank purchases one- to four-family loans, on a loan-by-loan basis, from
a select group of correspondent lenders. Loan purchases enable the Bank to attain
geographic diversification in the loan portfolio.
The Bank has an agreement with a third-party mortgage sub-servicer to provide
loan servicing for loans originated by the Bank's correspondent lenders in certain
states. The sub-servicer has experience servicing loans in the market areas
in which we purchase loans and services the loans according to the Bank's servicing
standards, which is intended to allow the Bank greater control over servicing
and reporting and help maintain a standard of loan performance.
The Bank has also purchased one- to four-family loans from correspondent and
nationwide lenders in bulk loan packages. The last bulk loan package purchased
by the Bank was in August 2012. The servicing rights were generally retained
by the lender/seller for the loans purchased from nationwide lenders. The servicing
with nationwide lenders is governed by a servicing agreement, which outlines
collection policies and procedures, as well as oversight requirements, such
as servicer certifications attesting to and providing proof of compliance with
the servicing agreement.
Underwriting
Full documentation to support an applicant's credit and income, and sufficient
funds to cover all applicable fees and reserves at closing, are required on
all loans. Generally, loans are underwritten according to the "ability
to repay" and "qualified mortgage" standards, as issued by the
Consumer Financial Protection Bureau ("CFPB"), with total debt-to-income
ratios not exceeding 43% of a borrower's verified income. Information pertaining
to the creditworthiness of the borrower generally consists of a summary of the
borrower's credit history, employment stability, sources of income, assets,
net worth, and debt ratios. The value of the subject property must be supported
by an appraisal report prepared in accordance with our appraisal policy by either
a staff appraiser or a fee appraiser, both of which are independent of the loan
origination function and who are approved by our Board of Directors.
Loans over $500 thousand must be underwritten by two senior underwriters. Any
loan over $750 thousand must be approved by our Asset and Liability Management
Committee ("ALCO"), and loans over $1.5 million must be approved by
our Board of Directors. For loans requiring ALCO and/or Board of Directors'
approval, lending management is responsible for presenting to ALCO and/or the
Board of Directors information about the creditworthiness of the borrower and
the market value of the subject property.
The underwriting standards for loans purchased from correspondent and nationwide
lenders are generally similar to the Bank's internal underwriting standards.
The underwriting of correspondent loans is performed by the Bank's underwriters.
Our standard contractual agreement with the lender/seller includes recourse
options for any breach of representation or warranty with respect to the loans
purchased.
Adjustable-rate loans
Current adjustable-rate one- to four-family loans originated by the Bank generally
provide for a specified rate limit or cap on the periodic adjustment to the
interest rate, as well as a specified maximum lifetime cap and minimum rate,
or floor. As a consequence of using caps, the interest rates on these loans
may not be as rate sensitive as our cost of funds. Negative amortization of
principal is not allowed. For three- and five-year adjustable-rate mortgage
("ARM") loans, borrowers are qualified based on the principal, interest,
tax, and insurance payments at the initial interest rate plus the life of loan
cap and the initial interest rate plus the first period cap, respectively. For
seven-year ARM loans, borrowers are qualified based on the principal, interest,
tax, and insurance payments at the initial rate. After the initial three-, five-,
or seven-year period, the interest rate resets annually and the new principal
and interest payment is based on the new interest rate, remaining unpaid principal
balance, and term of the ARM loan. Our ARM loans are not automatically convertible
into fixed-rate loans; however, we do allow borrowers to pay an endorsement
fee to convert an ARM loan to a fixed-rate loan. ARM loans can pose greater
credit risks than fixed-rate loans, primarily because as interest rates rise,
the borrower's payment also rises, increasing the potential for default. This
specific type of risk is known as repricing risk.
Pricing
Our pricing strategy for first mortgage loan products includes setting interest
rates based on secondary market prices and local competitor pricing for our
local lending markets, and secondary market prices and national competitor pricing
for our correspondent lending markets. ARM loans are offered with a three-year,
five-year, or seven-year term to the initial repricing date. After the initial
period, the interest rate for each ARM loan adjusts annually for the remainder
of the term of the loan. Currently, new originations are tied to London Interbank
Offered Rates ("LIBOR"); however, other indices have been used in
the past.
Mortgage Insurance
For a mortgage with a loan-to-value ("LTV") ratio in excess of 80%
at the time of origination, private mortgage insurance ("PMI") is
required in order to reduce the Bank's loss exposure. The Bank will lend up
to 97% of the lesser of the appraised value or purchase price for one- to four-family
loans, provided PMI is obtained. Management continuously monitors the claim-paying
ability of our PMI counterparties. We believe our PMI counterparties have the
ability to meet potential claim obligations we may file in the foreseeable future.
Loan endorsement program
In an effort to offset the impact of repayments and to retain our customers,
existing loan customers, including customers whose loans were purchased from
a correspondent lender, have the opportunity, for a cash fee, to endorse their
original loan terms to current loan terms being offered. Customers whose loans
have been sold to third parties, or have been delinquent on their contractual
loan payments during the previous 12 months, or are currently in bankruptcy,
are not eligible to participate in this program. The Bank does not solicit customers
for this program, but considers it a valuable opportunity to retain customers
who, based on our initial underwriting criteria, could likely obtain similar
financing elsewhere.
Repayment
The Bank's one- to four-family loans are primarily fully amortizing fixed-rate
or ARM loans. The contractual maturities for fixed-rate loans can be up to 30
years and the contractual maturities for ARM loans can be up to 30 years; however,
there are certain bulk purchased ARM loans that had original contractual maturities
of 40 years. Our one- to four-family loans are generally not assumable and do
not contain prepayment penalties. A "due on sale" clause, allowing
the Bank to declare the unpaid principal balance due and payable upon the sale
of the secured property, is generally included in the security instrument.
Loan sales
One- to four-family loans may be sold on a bulk basis for portfolio restructuring
or on a flow basis as loans are originated to reduce interest rate risk and/or
maintain a certain liquidity position. Loans originated by the Bank are generally
eligible for sale in the secondary market. The Bank generally retains the servicing
on these loans. ALCO determines the criteria upon which one- to four-family
loans are to be originated as held-for-sale or held-for-investment. One- to
four-family loans originated as held-for-sale are to be sold in accordance with
policies set forth by ALCO. One- to four-family loans originated as held-for-investment
are generally not sold unless a specific segment of the portfolio is identified
for asset restructuring purposes.
Construction Lending. The Bank originates and purchases construction-to-permanent
loans primarily secured by one- to four-family residential real estate, as well
as by multi-family dwellings and commercial real estate. The underwriting details
for multi-family dwelling and commercial real estate are presented in the "Multi-family
and Commercial Lending" section below.
The majority of the one- to four-family construction loans are secured by property
located within the Bank's Kansas City market area. Construction loans are obtained
by homeowners who will occupy the property when construction is complete. Construction
loans to builders for speculative purposes are not permitted. The application
process includes submission of complete plans, specifications, and costs of
the project to be constructed. All construction loans are manually underwritten
using the Bank's internal underwriting standards.
The Bank's one- to four-family construction-to-permanent loan program combines
the construction loan and the permanent loan into one loan allowing the borrower
to secure the same interest rate throughout the construction period and the
permanent loan. The loan products and interest rate offered for the one- to
four-family construction-to-permanent loan program are the same as what is offered
for non-construction one- to four-family loans. The loan term is longer than
the non-construction one- to four-family loans due to consideration for the
construction period, which is generally between 12 and 18 months.
Construction draw requests and the supporting documentation are reviewed and
approved by authorized management or experienced construction loan personnel.
The Bank also performs regular documented inspections of the construction project
to ensure the funds are being used for the intended purpose and the project
is being completed according to the plans and specifications provided. The Bank
charges a 1% fee at closing, based on the loan amount, for these administrative
requirements. Interest is not capitalized during the construction period; it
is billed and collected monthly based on the amount of funds disbursed. Once
the construction period is complete, the payment method is changed from interest-only
to an amortized principal and interest payment for the remaining term of the
loan.
Consumer Lending. The Bank offers a variety of secured consumer loans, including
home equity loans and lines of credit, home improvement loans, auto loans, and
loans secured by savings deposits. The Bank also originates a very limited amount
of unsecured loans. The Bank does not originate any consumer loans on an indirect
basis, such as contracts purchased from retailers of goods or services which
have extended credit to their customers.
Multi-family and Commercial Lending. These loans were originated by the Bank
or were in participation with a lead bank, and are secured primarily by multi-family
dwellings or commercial real estate. The Bank has expanded, and intends to continue
expanding, its commercial real estate and construction loan portfolio through
our correspondent lending channel.