In Guidance on Nontraditional Mortgage Product Risks, if the institution has a concentration in a nontraditional mortgage portfolio, the institution should:
Click on the arrows to vote for the correct answer
A. B. C. D.D
In the Guidance on Nontraditional Mortgage Product Risks, issued by the Federal Financial Institutions Examination Council (FFIEC), financial institutions are advised to have appropriate risk management practices for nontraditional mortgage products. The guidance highlights the risks associated with nontraditional mortgage products such as payment shock, negative amortization, and interest-only loans.
If an institution has a concentration in a nontraditional mortgage portfolio, it should have well-developed monitoring systems and risk management practices. This means that the institution should have effective policies, procedures, and controls in place to identify, measure, monitor, and control the risks associated with the nontraditional mortgage products. The institution should also have the capability to monitor by originator and key borrower and portfolio characteristics. This would allow the institution to track the performance of individual loans and identify any emerging risks.
Option C, "Not understand the risk of payment shock and negative amortization," is incorrect. Financial institutions should understand the risks associated with nontraditional mortgage products, including payment shock and negative amortization, as highlighted in the guidance.
Therefore, the correct answer is D, "A and B." Financial institutions with a concentration in nontraditional mortgage products should have well-developed monitoring systems and risk management practices and should monitor by originator and key borrower and portfolio characteristics to identify any emerging risks associated with these products.