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Inactive Financial Institution Letters 

[Federal Register: September 12, 1997 (Volume 62, Number 177)]
[Page 48089-48092]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Uniform Retail Credit Classification Policy

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Notice and request for comment.


SUMMARY: The Board of Governors of the Federal Reserve System (FRB),
the Federal Deposit Insurance Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), and the Office of Thrift Supervision
(OTS) (collectively referred to as the agencies), under the auspices of
the Federal Financial Institutions Examination Council (FFIEC), are
requesting comment on changes to the 1980 Uniform Policy for
Classification of Consumer Instalment Credit Based on Delinquency
Status (1980 policy). The 1980 policy is used by the agencies for
classifying retail credit loans of financial institutions on a uniform
    The FFIEC is currently reviewing the 1980 policy to determine where
revisions may be necessary to more accurately reflect the changing
nature of risk in today's retail credit environment. The preliminary
results of this review indicate that revisions should include: a
charge-off policy for open-end and closed-end credit; a classification
policy for loans affected by bankruptcy, fraudulent activity, and/or
death of a borrower; a prudent re-aging policy for past due accounts;
and a classification policy for delinquent residential mortgage and
home equity loans.
    Before developing a revised policy statement for public comment,
the FFIEC is first soliciting comments on: areas in the existing policy
statement that may need to be revised; specific recommendations for
changing the policy statement; data that would help quantify the
financial or business impact on financial institutions if the existing
policy was revised; and an estimate of the time frames necessary for

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an institution to successfully implement the revisions. After reviewing
the input received, the FFIEC will issue a revised policy statement for
public comment that establishes clear guidance for the industry; is
based on an informed and reasonable analysis of all available data; and
satisfies the principles of sound and effective supervision.

DATES: Comments must be received by November 12, 1997.

ADDRESSES: Comments should be sent to Joe M. Cleaver, Executive
Secretary, Federal Financial Institutions Examination Council, 2100
Pennsylvania Avenue NW, Suite 200, Washington, DC 20037 or by facsimile
transmission to (202) 634-6556.


    FRB: William Coen, Supervisory Financial Analyst, (202) 452-5219,
Division of Banking Supervision and Regulation, Board of Governors of
the Federal Reserve System. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Dorothea Thompson, (202)
452-3544, Board of Governors of the Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551.
    FDIC: James Leitner, Examination Specialist, (202) 898-6790,
Division of Supervision. For legal issues, Michael Phillips, Counsel,
(202) 898-3581, Supervision and Legislation Branch, Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
    OCC: Cathy Young, National Bank Examiner, Credit Risk Division,
(202) 874-4474; Ron Shimabukuro, Senior Attorney, Legislative and
Regulatory Activities Division, Office of the Comptroller of the
Currency (202) 874-5090, 250 E Street SW, Washington, DC 20219.
    OTS: William J. Magrini, Senior Project Manager, (202) 906-5744,
Supervision Policy; Vern McKinley, Attorney, (202) 906-6241,
Regulations and Legislation Division, Chief Counsel's Office, Office of
Thrift Supervision, 1700 G Street NW, Washington, DC 20552.


Background Information

    On June 30, 1980, the FRB, FDIC, and OCC adopted the FFIEC uniform
policy for classification of open-end and closed-end credit. The OTS
adopted the policy in 1987. The policy was issued to establish uniform
guidelines for the classification of instalment credit based on
delinquency status. While the 1980 policy recognized the statistical
validity of measuring losses predicated on past due status, the 1980
policy also permitted exceptions to the classification policy in
situations where significant amounts were involved or when a loan was
well secured and in the process of collection.
    A fundamental objective of the 1980 policy is the timely
recognition of losses as required by generally accepted accounting
principles (GAAP). While the 1980 policy provides general guidance for
a large segment of the retail credit portfolio, it does not provide
supervisory guidance on loan charge-offs related to consumer
bankruptcy, fraudulent activities, and accounts of decedents.
Furthermore, no guidance is provided on the classification of
delinquent residential mortgages and home equity loans. In light of the
questionable asset quality of many of these accounts and the
inconsistent way in which financial institutions report and charge-off
these accounts, the FFIEC believes that additional supervisory guidance
is necessary.

Request for Comments in the Following Areas

(1) Charge-off Policy for Open-End and Closed-End Credit

    The agencies recognize the inconsistency between the level of risk
associated with open-end and closed-end credit and the policy for
charging-off delinquent accounts. Under the 1980 policy, open-end
credit, which is generally unsecured, should be charged-off when an
account is 180 days delinquent. Conversely, closed-end credit, which is
normally secured by some type of collateral, is subject to a more
stringent policy of 120 days delinquent before a loan is charged off.
Over the years this inconsistency has become more apparent as the
market for open-end credit evolved.
    In 1980, open-end credit generally consisted of credit card
accounts with small credit lines that limited the exposure an
institution had to an individual borrower. In today's environment,
open-end credit generally includes accounts with much larger lines of
credit and higher risk levels. The change in the nature of these
accounts, combined with the variety of charge-off practices examiners
recently encountered, raised the concern of the agencies. To address
this concern, the FFIEC is seeking public comment on whether a charge-
off policy that is more consistent with the risk associated with open-
end and closed-end accounts should be adopted and if so, what that
policy should be. Specifically, the FFIEC requests comment on:
    (1)(a) Should a uniform time frame be used to charge-off both open-
end and closed-end accounts?
    (1)(b) If so, what should that time frame be?
    (1)(c) If a uniform time frame for both types of credit is not
considered appropriate, what time frames are reasonable for charging
off open-end credit and closed-end credit? Please explain.
    (1)(d) If there was a change in the time frames for charging-off
delinquent accounts, what is a reasonable time frame to allow
institutions to comply with such a change?
    (1)(e) Should the current regulatory practice be continued of
classifying open-end and closed-end credit Substandard when the account
is 90 days or more delinquent? If not, what alternative would you
suggest? Please explain the benefits of a suggested alternative.
    (1)(f) Should a standard for the Doubtful classification be adopted
and, if so, what should be the standard and why?
    (1)(g) Currently, no requirement exists to place retail credit
loans on nonaccrual status. Should guidance for placing loans on a
nonaccrual status be adopted and, if so, at how many days delinquent
should open-end credit and closed-end credit be placed on a nonaccrual
    (1)(h) An alternative to a requirement that accounts be charged-off
after a designated delinquency is the creation of an allocated or
specific reserve. Should the FFIEC require an allocated or specific
reserve, and if so, when should it be established? Please discuss the
advantages and disadvantages of such a proposal.

(2) Bankruptcy, Fraud, and Deceased Accounts

    No FFIEC guidance exists for bankruptcy, fraud, and deceased
accounts. The FFIEC believes guidance on these accounts is needed to
ensure recognition of loss among regulated institutions is timely and
consistent. Comment is requested on the need to provide such guidance
and on the following more specific issues.
    (2)(a) Should there be separate guidance for determining when an
account should be charged-off for Chapter 7 bankruptcies and Chapter 13
bankruptcies? If so, what should that guidance be?
    (2)(b) What event in the bankruptcy process should trigger loss
recognition: the filing date, the date of notification to the creditor
by the bankruptcy court that a borrower has filed for bankruptcy, the
date that the bankruptcy trustee

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meets with the creditors, or some other date? Please explain why one
date is better than another.
    (2)(c) How much time is needed by an institution to process the
charge-off after any one of the bankruptcy events identified in
question 2(a)?
    (2)(d) As an alternative to an immediate charge off, would it be
beneficial to set up a specific reserve account at the time of the
filing and charge the loss to that reserve account at the bankruptcy
discharge date? Please explain the pros and cons of this alternative.
    (2)(e) Subsequent to notification, how much time is needed by an
institution to charge-off losses due to loan fraud?
    (2)(f) Subsequent to notification, how much time is needed by an
institution to charge-off losses on loans to deceased borrowers?

(3) Partial Payments

    The 1980 policy includes a provision that 90 percent of a
contractual payment will be considered a full payment. However, if less
than 90 percent is received, no recognition of any payment is given.
The FFIEC is considering eliminating this policy provision and giving
credit for any partial payments received. If such a change is adopted,
a loan will be considered one month delinquent when the sum of the
missed portions of the payments equals one full payment. A series of
partial payments could result in accumulating delinquencies. For
example, if a regular installment payment is $300 and the borrower
makes payments of only $150 per month for a six-month period, the loan
would be $900, or three full months delinquent.
    (3)(a) Should borrowers receive credit for partial payments in
determining delinquency using the method described? If so, would such a
change require significant computer programming changes? Are there
other reasonable alternatives?
    (3)(b) If partial payments are allowed, how should the payment be
    (3)(b)(1) Pro rata, equally to principle and interest.
    (3)(b)(2) First to principle, any remaining to interest.
    (3)(b)(3) Other.
    No guidance currently exists on fixed payment programs. Fixed
payment accounts are accounts for which a payment plan (less than
contractual) has been established as a result of credit counseling,
bankruptcy proceedings, or direct negotiations.
    (3)(c) Should the FFIEC adopt policy guidance on fixed payment
programs? What should that guidance be?

(4) Re-Aging, Extension, Renewal, or Deferral Policy

    Re-aging is the practice of bringing a delinquent account current
after the borrower has demonstrated a renewed willingness and ability
to repay the loan by making some, but not all, past due payments. A
permissive re-aging policy on credit card accounts or an extension,
renewal, or deferral policy on other types of retail credit can distort
the true performance and delinquency status of individual accounts and
the entire portfolio. Re-aging, extension, renewal, or deferral of
delinquent loans is an acceptable practice when it is based on recent,
satisfactory performance and other positive credit factors of the
borrower and when it is structured in accordance with prudent internal
policies. Institutions that re-age, extend, renew, or defer accounts
should establish a reasonable policy and ensure that it is followed by
adopting appropriate operating standards. While no FFIEC guidance
currently addresses this issue, it is an area where uniform guidance is
appropriate to protect against distortions in the performance of the
consumer loan portfolio. The following standards are under
    (4)(a) The borrower shows a renewed willingness and ability to
repay the loan. Is this standard appropriate?
    (4)(b) The borrower makes a certain number of contractual payments
or the equivalent amount. How many payments are appropriate?
    (4)(c) The loan can only be re-aged, extended, renewed, or deferred
once within a specified time. What time frame is appropriate? Should
there be a limit to the number of re-agings over the life of an
account? If so, what should that limit be?
    (4)(d) The account must be in existence for a certain period of
time before it can be re-aged, extended, renewed, or deferred. What
time period is appropriate?
    (4)(e) The loan balance should not exceed the predelinquency credit
limits (last limit approved by bank). Is this standard appropriate?
    (4)(f) Other. What other standards should be considered?

(5) Residential and Home Equity Loans

    No FFIEC uniform classification policy exists for residential and
home equity loans. Since most of these loans are underwritten using
uniform credit criteria, the FFIEC supports reviewing and classifying
these portfolios on an aggregate basis. The FFIEC is considering the
substandard classification based on delinquency status.
    As the delinquency progresses, repayment becomes dependent on the
sale of the real estate collateral. For collateral dependent loans,
GAAP requires that any loan amount in excess of the collateral's fair
value less cost to sell should be charged off, or that a valuation
allowance be established for that excess amount. The FFIEC is
considering requiring that an evaluation of the residential collateral
be made within a prescribed delinquency time frame to determine fair
    (5)(a) Should residential and home equity loans be classified
substandard at a certain delinquency (similar to the time period used
in open-end and closed-end credit)? If so, what should that delinquency
    (5)(b) Should the FFIEC require a collateral evaluation at a
certain delinquency? If so, what should that delinquency time frame be?

(6) Need for Additional Retail Credit Guidance

    The FFIEC notes that classification policies are just one component
of prudent loan portfolio management. Classification policies, by
themselves, do not address potential problems or weaknesses that may
exist in the origination and underwriting of such loans.
    (6)(a) What type of additional supervisory guidance is needed or
would be beneficial to address this or other aspects of retail credit
portfolio management?
    (6)(b) Should there be additional supervisory guidance on the loan
loss reserve for retail credit?

(7) Industry Experience and Impact

    The FFIEC welcomes comment on any other issues that it should
consider in updating this policy. Additionally, the FFIEC would benefit
from receiving financial institutions' data on their charge off and
recovery experience rates for charged-off open-end credit, closed-end
credit, loans in bankruptcy, fraudulent loans, or loans of deceased
persons. The FFIEC is also interested in understanding the financial
and business practice impact that these policy changes may have.
Revisions to the 1980 policy may result in changes to the Call Report,
which may require banks to make reporting system changes. If an
institution's recommendations vary from current business practice,
please provide an estimate of the programming costs or other costs that
will be incurred to change the practice and report accurately. Some
institutions have securitized and sold their loans, but such loans are
still under institution

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management. Please comment on how the FFIEC should treat such loans.

    Dated: September 9, 1997.
Joe M.Cleaver,
Executive Secretary, Federal Financial Institutions Examination
[FR Doc. 97-24235 Filed 9-11-97; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P
Last Updated 07/17/1999 communications@fdic.gov