MBA Submits Comments to OCC on Draft Principles for Climate-Related Financial Risk Management

The Mortgage Bankers Association last week submitted comments to the Office of the Comptroller of the Currency on its draft principles for climate-related financial risk management for large banks.

The letter reflects MBA’s focus on mortgage lending and servicing activities of covered banks, including commercial, multifamily and single-family mortgage lending and servicing. Specifically, MBA expressed concerns on the impact of climate-related events that could result in increases in the credit risk associated with mortgages – and how these risks are managed.

Mike Flood

“The impacts of climate-related physical and transition risks to mortgages are likely to be experienced principally in the form of credit risk,” MBA said. “Acute climate-related events, such as hurricanes, wildfires, floods, heat waves and chronic shifts in climate, including higher average temperatures, changes in precipitation patterns, sea level rise and ocean acidification that result in damage to property securing a mortgage can result in unexpected costs to borrowers or losses to income, and can reduce the value of the property, all of which increase credit risk. Shifts in policy, consumer and business sentiment, or technologies associated with the changes necessary to limit climate change can have similar impacts that also could increase credit risk.”

Pete Mills

The OCC issued the Draft Principles to address its concern that banks’ exposure to climate-related financial risks could affect the safety and soundness of banks and the overall financial system. The Draft Principles arise from the OCC’s concern that “[w]eaknesses in how banks identify, measure, monitor and control the potential physical and transition risks associated with a changing climate could adversely affect a bank’s safety and soundness, as well as the overall financial system.”

The OCC describes those physical and transition risks as follows:

–Physical risks: the harm to people and property arising from acute, climate-related events, such as hurricanes, wildfires, floods and heatwaves, and chronic shifts in climate, including higher average temperatures, changes in precipitation patterns, sea level rise and ocean acidification.

–Transition risks: stresses to certain banks or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes necessary to limit climate change.

MBA Senior Vice President of Commercial/Multifamily Policy and Member Engagement Mike Flood MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills urged the OCC to take a measured approach.

“We appreciate the overall approach to climate-related financial risk reflected in the Draft

Principles,” the MBA letter said. “Climate-related financial risk is a long-standing risk factor that is likely growing more acute and is, therefore, subject to increased attention and analysis. The collective understanding of this risk, however, remains in its relative infancy. The OCC’s principles-based approach is, therefore, welcome and preferable to a more prescriptive approach.”

From the perspective of mortgage lending and servicing, MBA said it agrees with the general principle that climate-related impacts to credit risk can be analyzed across various dimensions, including sectoral and geographic, to assess both current and possible future credit risk exposure from physical and transition risks, including concentrations of risk. “MBA also appreciates that the OCC is considering a principles-based rather than prescriptive approach, and is focused on leveraging existing risk management frameworks rather than calling for an entirely new framework. We urge the OCC to encourage other supervisors to adopt a similar approach, and we also urge supervisors to recognize that this an evolving area with an evolving understanding of the risks.”

MBA also said it supports the OCC’s distinction between climate scenario analysis and regulatory stress testing and urged the OCC to “recognize the exploratory nature of scenario analysis given the limited availability and nascent state of methodologies and models. Relatedly, the OCC should recognize that time horizons that may be appropriate for any particular scenario analysis will be a function of the purpose of each analysis, the context of the analysis and possibly the availability of data.”

Following its consideration of feedback on the Draft Principles as well as lessons learned and best practices from the industry and other jurisdictions, the OCC plans to issue guidance that would address the respective roles and responsibilities of boards of directors and management and, consistent with the OCC’s risk-based approach to supervision, “appropriately tailor any resulting supervisory expectations to reflect differences in banks’ circumstances such as complexity of operations and business models.”

MBA urged the OCC to “continue the high-level, principles-based approach towards managing climate-change risk facing OCC-supervised banks and to work with other prudential supervisors to encourage them to adopt an aligned approach to their supervision of financial institutions’ management of climate-related financial risk. We also urge the OCC to appropriately temper its expectations by balancing its intent to increase banks’ efforts in the area of climate-related financial risk with the recognition that this an evolving area and, as such, banks are at the early stages of learning to assess and understand the nature of the associated risks. With such a balance, we urge the OCC to facilitate progress in banks’ efforts to integrate climate-related financial risk into their existing risk-management frameworks by engaging in constructive dialogue at different stages with banks and sharing information on applicable risk-management best practices. The Draft Principles may provide an appropriate foundation for such initial constructive dialogue.”