Agencies Issue Advisory on Mortgage Banking Activities
February 28, 2003
Circular No. 11501

To All State Member Banks, Bank Holding Companies, State-Licensed Branches and Agencies of Foreign Banks and Others Concerned in the Second Federal Reserve District:

In a press release, the Federal Reserve Board and other bank and thrift regulatory agencies jointly issued an advisory discussing risks related to mortgage banking activities. The advisory highlights concerns and provides guidance regarding mortgage banking activities, primarily in the valuation, accounting and hedging of mortgage servicing assets.

The guidance applies to all banks and thrifts; however, it is primarily applicable to those institutions that are actively involved in mortgage banking activities. While the number of institutions with significant exposure to mortgage banking assets is limited, mortgage banking is a significant and growing business line for many institutions.

The agencies developed the guidance in response to recent examinations and market developments, especially the record volume of refinancings caused by the decline in interest rates. The guidance details the agencies' expectations regarding risk management activities including valuation and modeling processes, hedging activities, management information systems, and internal audit. The guidance also notes that the agencies may require additional capital for institutions that fail to consider the sound practices set forth in this advisory in their risk management programs.

Questions on this matter and the related Federal Reserve Board staff supervisory letter (03-4) dated February 25, 2003 may be directed to your relationship specialist.