FDIC Federal Register Citations

[Federal Register: February 10, 1999 (Volume 64, Number 27)]

[Notices]

[Page 6655-6659]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr10fe99-89]

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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL

Uniform Retail Credit Classification and Account Management

Policy

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Final notice.

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SUMMARY: The Federal Financial Institutions Examination Council

(FFIEC), on behalf of 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, is

publishing its revisions to the Uniform Policy for Classification of

Consumer Installment Credit Based on Delinquency Status (Uniform Retail

Credit Classification Policy). The National Credit Union Administration

(NCUA), also a member of FFIEC, does not plan to adopt the policy at

this time.

The Uniform Retail Credit Classification and Account Management

Policy is a supervisory policy used by the Agencies for uniform

classification and treatment of retail credit loans in financial

institutions.

DATES: Changes in this policy that involve manual adjustments to the

institutions' policies and procedures should be implemented for

reporting in the June 30, 1999 Call Report or Thrift Financial Report,

as appropriate. Any policy changes involving programming resources,

should be implemented for reporting in the December 31, 2000 Call

Report or Thrift Financial Report, as appropriate.

FOR FURTHER INFORMATION CONTACT: 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: Stephen Jackson, National Bank Examiner, Credit Risk Division,

(202) 874-4473, or Ron Shimabukuro, Senior Attorney, Legislative and

Regulatory Activities Division (202) 874-5090, Office of the

Comptroller of the Currency, 250 E Street SW, Washington, DC 20219.

OTS: William J. Magrini, Senior Project Manager, (202) 906-5744,

Supervision Policy; or Vern McKinley, Senior Attorney, (202) 906-6241,

Regulations and Legislation Division, Chief Counsel's Office, Office of

Thrift Supervision, 1700 G Street NW, Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

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 (1980

policy). The Federal Home Loan Bank Board, the predecessor of the OTS,

adopted the 1980 policy in 1987. The 1980 policy established uniform

guidelines for classification of installment credit based on

delinquency status and provided different charge-off time frames for

open-end and closed-end credit. The 1980 policy recognized the

statistical validity of determining losses based on past due status.

The Agencies undertook a review of the 1980 policy as part of their

review of all written policies mandated by Section 303(a) of the Riegle

Community Development and Regulatory Improvement Act of 1994 (CDRI). As

noted in their September 23, 1996 Joint Report to Congress on CDRI

review efforts,¹ the Agencies believe that the 1980 policy

should be revised due to changes that have taken place within the

industry.

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\1\ Joint Report: Streamlining of Regulatory Requirements--

Section 303(a)(3) of the Riegle Community Development and Regulatory

Improvement Act of 1994, page I-41.

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In 1980, open-end credit consisted largely of credit card accounts

with small lines of credit to the most creditworthy borrowers. Today,

open-end credit generally includes accounts with much larger lines of

credit to diverse borrowers with a variety of risk profiles. The change

in those accounts and inconsistencies in reporting and charge-off

practices of open-end accounts by financial institutions prompted the

Agencies to consider several revisions to the 1980 policy.

Specifically, the FFIEC had concerns

[[Page 6656]]

that a number of institutions were not following existing policy

guidance for charging off open-end accounts based on past due status.

Charge-off practices ranged from 120 days to 240 days. This range

reflected, in part, differing interpretations by some institutions with

regard to the policy's guidance to charge off open-end loans by the

seventh zero billing cycle. In addition, the 1980 policy did not

establish guidance for charging off fraudulent accounts, accounts of

deceased persons, or accounts of borrowers in bankruptcy (accounts in

bankruptcy), which currently account for a large portion of total

charge-offs. Moreover, no classification guidance existed for

residential and home equity loans--a significant amount of consumer

credit. Finally, no uniform guidance existed for handling re-aging of

open-end credit, or extensions, deferrals, renewals, or re-writes of

closed-end credit.

As a result of these concerns, the FFIEC published two notices in

the Federal Register on September 12, 1997 (1997 Notice) (62 FR 48089)

and on July 6, 1998 (1998 Notice) (63 FR 36403) requesting comment on

various proposed revisions to the 1980 policy. Comments received during

both periods provided extremely useful guidance to the FFIEC. After

careful consideration, the FFIEC has made several changes to its

earlier proposals and adopted those changes in this final policy

statement. While the comments proved extremely helpful, the FFIEC is

mindful of the Agencies' missions to promote safety and soundness of

the financial industry and to recommend regulatory policies and

standards that further those missions. In keeping with the Agencies'

goals of promoting safety and soundness, certain aspects of the final

notice are a departure from what the majority of commenters suggested.

Comments Received

The FFIEC received a total of 128 comments in response to the 1998

Notice. They came from 25 banks and thrifts, 19 bank holding companies,

8 regulatory agencies, 13 trade groups, 33 consumer credit counseling

services, and 30 other companies and individuals. The following is a

summary.

1a. Charge-off Policy for Open-End and Closed-End Credit. The 1998

Notice proposed two options for charging off delinquent accounts. The

first proposed that both closed-end and open-end credit be charged off

at 150 days delinquency. The second option proposed to retain, but

clarify existing policy; charge off closed-end credit at 120 days

delinquency and charge off open-end credit at 180 days delinquency.

Commenters were overwhelmingly in favor of retaining the existing 120/

180 charge-off time frames. Commenters representing the credit card

industry stated that shortening time frames to 150 days would cause a

$2 billion dollar write-off initially, with further impact during

implementation. Moreover, credit card companies and community groups

and counseling services stated that they needed those extra 30 days in

the period from 150 days delinquency to 180 days delinquency to work

with troubled borrowers. Several lenders indicated that they can

collect ten percent or more of accounts during that time period. After

careful consideration, the FFIEC has decided not to pursue uniform

charge-off time frames for open-end and closed-end credit at this time.

Moreover, since the revision to the 1980 policy was initiated, the

majority of institutions whose open-end charge-off policy exceeded 180

days have brought themselves into compliance. However, because of

confusion over the terminology of ``seven zero billing cycles,'' the

FFIEC decided to eliminate that language in the final policy.

Additionally, the FFIEC is adopting re-aging guidance so that greater

consistency and clarity in reporting among retail credit lenders will

be achieved.

1b. Substandard classification policy.--The majority of the

comments received in response to the 1997 Notice supported retention of

classifying open-end and closed-end consumer credit at 90 days

delinquency. No objections were received in response to the 1998

Notice. The FFIEC agrees with the commenters. It believes that when an

account is 90 days past due, it displays weakness warranting

classification. Therefore, open-end and closed-end accounts will

continue to be classified Substandard at 90 days past due.

2. Bankruptcy, fraud and deceased accounts. Bankruptcy.--The 1998

Notice requested comment on two proposals relating to treatment of

accounts in bankruptcy. First, the 1998 Notice asked whether unsecured

loans in bankruptcy should be charged off by the end of the month in

which a creditor is notified of the bankruptcy filing. Second, the 1998

Notice proposed that for secured and partially secured accounts in

bankruptcy, the collateral should be evaluated and any deficiency

balance charged off within 30 days of notification.

The majority of the commenters believed that revised bankruptcy

legislation would pass in the second session of the 105th Congress and

asked the FFIEC to defer a decision on this issue pending new

legislation. The FFIEC was prepared to conform the final policy

statement to any new legislation; however, no legislation was enacted.

Because widespread inconsistencies in charge-off practices on accounts

in bankruptcy continue to exist, the FFIEC is adopting guidance at this

time. If and when bankruptcy legislation is enacted, the FFIEC will

review the policy statement to determine if any revisions are needed.

Commenters objected to both of the proposed time frames on bankrupt

accounts. Fifty commenters opposed the proposal for unsecured accounts

in bankruptcy versus only ten who supported it. Twenty-two commenters

opposed the proposed handling of secured and unsecured accounts in

bankruptcy, while only 11 supported it. A number of creditors noted

that an accurate determination of loss on accounts in bankruptcy

realistically cannot be made until after the meeting with creditors.

This may be anywhere from 10 to 45 days or more after the bankruptcy

filing, depending upon the case load of the bankruptcy court. The FFIEC

shares the concerns of these commenters. Consequently, the final policy

statement has been revised, for unsecured, partially secured, and fully

secured accounts in bankruptcy, to allow creditors up to 60 days from

their receipt of the bankruptcy notice filing to charge off those

amounts deemed unrecoverable. However, accounts should be charged off

no later than the respective 120-day or 180-day time frames for closed-

end and open-end credit.

Fraud.--The 1998 Notice proposed that accounts affected by fraud be

charged off within 90 days of discovery of the fraud or within the

general charge-off time frames established by this final policy

statement, whichever is shorter. The majority of the commenters

supported this proposal. While the FFIEC recognizes that a fraud

investigation may last more than 30 days, it believes that 90 days

provides an institution sufficient time to charge off an account

affected by fraud. Therefore, this final policy statement adopts this

provision as proposed.

Accounts of deceased persons.--The 1998 Notice proposed that

accounts of deceased persons should be charged off when loss is

determined or within the classification time frames adopted by this

final policy statement. A majority of the commenters supported this

proposal. As discussed in the 1998 Notice, the FFIEC agrees that

determination of repayment potential on an account of a deceased person

may

[[Page 6657]]

take months when working through a trustee or the family. However, the

FFIEC believes the time frames established by this final policy

statement provide adequate time to determine the amount of the loss and

charge off that amount. For this reason, the final policy statement

adopts this provision as proposed.

3. Partial payments.--The 1998 Notice proposed that in addition to

the existing guidance that 90 percent of a contractual payment may be

considered a full payment in computing delinquency, the FFIEC allows an

institution to aggregate payments to give a borrower credit for partial

payments. The proposal stated that only one method should be allowed

throughout a loan portfolio. Some institutions stated that they were

already using both methods. One recommendation made by the commenters

and supported by the FFIEC was to eliminate the guidance that one

method be used consistently throughout the portfolio. These commenters

noted that these methods are used for different reasons. For instance,

the 90 percent method may handle errors in check writing while the

aggregate method enables institutions to work flexibly with troubled

borrowers. The FFIEC agrees with these commenters. Therefore, this

final policy statement has been revised to allow an institution to use

both methods in dealing with partial payments.

4. Re-aging, extension, renewal, deferral, or rewrite policy.--The

1998 Notice proposed a number of criteria be established before a re-

aging, extension, renewal, deferral, or rewrite of an account. A

majority of commenters supported the criteria that the borrower should

show a renewed willingness and ability to pay and that the account

should meet agency and bank guidelines. However, many commenters

generally opposed the following criteria:

<bullet> The borrower should make three minimum consecutive

payments or lump sum equivalent before being re-aged.

<bullet> An account should not be re-aged, extended, renewed,

deferred, or rewritten more than once within any twelve-month period.

<bullet> An account should be in existence for at least twelve

months before it can be re-aged, extended, deferred, or rewritten.

<bullet> No more than two re-agings, extensions, renewals,

deferrals, or rewrites should occur during the lifetime of the account.

<bullet> The re-aged balance should not exceed the predelinquency

credit limit.

While the FFIEC appreciates concerns of these commenters that

flexibility is required to work with troubled borrowers, it also

recognizes this has the greatest potential for masking the delinquency

status of accounts. Consistent guidelines are needed to ensure the

integrity of financial records and prevent abuses (such as automated

re-aging programs). In addition, the FFIEC believes that an account

should show some performance before a re-aging is allowed. In response

to commenters' concerns, the Agencies modified the proposed guidelines.

For example, to provide flexibility for lenders to work with borrowers,

but still maintain the integrity of asset quality reports, the Agencies

changed the proposed re-aging guidelines to allow accounts to be re-

aged not more than twice in a five-year period. Therefore, in

considering the commenters' views and the Agencies' missions of

ensuring safety and soundness of institutions' loan assets, the

following criteria are being adopted:

<bullet> The borrower should show a renewed willingness and ability

to repay.

<bullet> The account should meet agency and bank policy standards.

<bullet> The borrower should make three minimum consecutive monthly

payments or the lump sum equivalent before an account is re-aged.

<bullet> The account should be in existence at least nine months.

<bullet> An account should not be re-aged, deferred, extended,

renewed or rewritten more than once within any twelve-month period, and

not more than twice in a five-year period.

<bullet> An over limit account may be re-aged at its outstanding

balance (including the over limit balance, interest, and fees) but new

credit should not be extended until the account balance is below its

designated credit limit.

5. Residential and home equity loans.--The 1998 Notice proposed

that institutions holding both one- to four-family and home equity

loans to the same borrower that are delinquent 90 days or more with

loan-to-value ratios greater than 60 percent be classified Substandard.

In addition, the FFIEC proposed that a current evaluation of collateral

be made by the time the loan is 120 or 180 days past due for a closed-

end or open-end account, respectively.

Commenters were almost equally divided on this proposal during the

1998 Notice. However, in response to the 1997 Notice, the majority of

the commenters supported classifying the loans Substandard when they

are 90 days delinquent. Some commenters supported a different loan-to-

value ratio. Exposure to loss increases as the loan-to-value ratio of a

real estate loan increases. The agencies believe, however, that for

one- to four-family residential loans with loan-to-value ratios of 60

percent or less, ample collateral support exists to satisfy the loan.

Therefore the FFIEC believes that the classification of such loans is

not necessary. This final policy statement adopts the provision as

proposed.

In response to the 1998 Notice, the commenters opposed the

collateral evaluation. In response to the 1997 Notice, the majority of

the commenters supported the proposal that a collateral evaluation be

obtained. However, from the comments it appears that the proposal was

not clear because many commenters believed that a ``full'' appraisal

was required. The FFIEC agrees that the policy indicating that a

collateral evaluation be obtained was not intended to be burdensome and

that a full appraisal is not required. The policy reaffirms the need to

determine the amount of loss in the loan when delinquency reaches the

time frames for charge-off for non-real estate loans.

Implementation Period

In the 1998 Notice, it said that if the Agencies retained the 120/

180-day charge off time frames, the implementation period would begin

January 1, 1999. However, the Agencies recognize that for some

institutions, this may involve programming changes. The Agencies expect

institutions to begin implementation of this policy upon publication.

Manual changes should be implemented for reporting in the June 30, 1999

Call Report or Thrift Financial Report, as appropriate. Changes

involving programming resources should be implemented for reporting in

the December 31, 2000 Reports.

Final Policy Statement

After careful consideration of all the comments, the FFIEC adopts

this final policy statement. In general, this final policy statement:

<bullet> Establishes a uniform charge-off policy for open-end

credit at 180 days delinquency and closed-end credit at 120 days

delinquency.

<bullet> Provides uniform guidance for loans affected by

bankruptcy, fraud, and death.

<bullet> Establishes guidelines for re-aging, extending, deferring,

or rewriting past due accounts.

<bullet> Classifies certain delinquent residential mortgage and

home equity loans.

<bullet> Broadens recognition of partial payments that qualify as

full payments.

The FFIEC considered the effect of generally accepted accounting

[[Page 6658]]

principles (GAAP) on this statement. GAAP requires prompt recognition

of loss for assets or portions of assets deemed uncollectible. The

FFIEC believes that because this final policy statement provides for

prompt recognition of losses, it is fully consistent with GAAP.

The final statement is:

Uniform Retail Credit Classification and Account Management Policy

²

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\2\ Retail Credit includes open-end and closed-end credit

extended to individuals for household, family, and other personal

expenditures. It includes consumer loans and credit cards. For the

purpose of this policy, retail credit also includes loans to

individuals secured by their personal residence, including home

equity and home improvement loans.

The regulatory classifications used for retail credit are

Substandard, Doubtful, and Loss. These are defined as follows:

Substandard: An asset classified Substandard is protected

inadequately by the current net worth and paying capacity of the

obligor, or by the collateral pledged, if any. Assets so classified

must have a well-defined weakness or weaknesses that jeopardize the

liquidation of the debt. They are characterized by the distinct

possibility that the institution will sustain some loss if the

deficiencies are not corrected. Doubtful: An asset classified

Doubtful has all the weaknesses inherent in one classified

Substandard with the added characteristic that the weaknesses make

collection or liquidation in full, on the basis of currently

existing facts, conditions, and values, highly questionable and

improbable. Loss: An asset, or portion thereof, classified Loss is

considered uncollectible, and of such little value that its

continuance on the books is not warranted. This classification does

not mean that the asset has absolutely no recovery or salvage value;

rather, it is not practical or desirable to defer writing off an

essentially worthless asset (or portion thereof), even though

partial recovery may occur in the future.

Although the Board of Governors of the Federal Reserve System,

Federal Deposit Insurance Corporation, Office of the Comptroller of

the Currency, and Office of Thrift Supervision do not require

institutions to adopt identical classification definitions,

institutions should classify their assets using a system that can be

easily reconciled with the regulatory classification system.

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Evidence of the quality of consumer credit soundness is indicated

best by the repayment performance demonstrated by the borrower. Because

retail credit generally is comprised of a large number of relatively

small balance loans, evaluating the quality of the retail credit

portfolio on a loan-by-loan basis is inefficient and burdensome for the

institution being examined and examiners. Therefore, in general, retail

credit should be classified based on the following criteria:

<bullet> Open-end and closed-end retail loans past due 90

cumulative days from the contractual due date should be classified

Substandard.

<bullet> Closed-end retail loans that become past due 120

cumulative days and open-end retail loans that become past due 180

cumulative days from the contractual due date should be charged off.

The charge-off should be taken by the end of the month in which the

120-or 180-day time period elapses.³

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\3\ Fixed payment open-end retail accounts that are placed on a

closed-end repayment schedule should follow the closed-end charge-

off time frames.

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<bullet> Unless the institution can clearly demonstrate and

document that repayment on accounts in bankruptcy is likely to occur,

accounts in bankruptcy should be charged off within 60 days of receipt

of notification of filing from the bankruptcy court or within the time

frames specified in this classification policy, whichever is shorter.

The charge off should be taken by the end of the month in which the

applicable time period elapses. Any loan balance not charged off should

be classified Substandard until the borrower re-establishes the ability

and willingness to repay (with demonstrated payment performance for six

months at a minimum) or there is a receipt of proceeds from liquidation

of collateral.

<bullet> Fraudulent loans should be charged off within 90 days of

discovery or within the time frames specified in this classification

policy, whichever is shorter. The charge-off should be taken by the end

of the month in which the applicable time period elapses.

<bullet> Loans of deceased persons should be charged off when the

loss is determined or within the time frames adopted in this

classification policy, whichever is shorter. The charge-off should be

taken by the end of the month in which the applicable time period

elapses.

<bullet> One- to four-family residential real estate loans and home

equity loans that are delinquent 90 days or more with loan-to-value

ratios greater than 60 percent, should be classified Substandard.

<bullet> When a residential or home equity loan is 120 days past

due for closed-end credit and 180 days past due for open-end credit, a

current assessment of value ⁴ should be made and any

outstanding loan balance in excess of the fair value of the property,

less cost to sell, should be classified Loss.

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\4\ Additional information about content requirements of

evaluations can be found in the ``Interagency Appraisal and

Evaluation Guidelines'', October 27, 1994. For example, under

certain circumstances, evaluations could be derived from an

automated collateral evaluation model, drive-by inspection by bank

employee or contracted employee, and real estate market comparable

sales similar to the institution's collateral.

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Properly secured residential real estate loans with loan-to-value

ratios equal to or less than 60 percent are generally not classified

based solely on delinquency status. Home equity loans to the same

borrower at the same institution as the senior mortgage loan with a

combined loan-to-value ratio equal to or less than 60 percent, should

not be classified. However, home equity loans where the institution

does not hold the senior mortgage, that are delinquent 90 days or more

should be classified Substandard, even if the loan-to-value ratio is

equal to, or less than, 60 percent.

Other Considerations for Classification

If an institution can clearly document that the delinquent loan is

well secured and in the process of collection, such that collection

will occur regardless of delinquency status, then the loan need not be

classified. A well secured loan is collateralized by a perfected

security interest in, or pledges of, real or personal property,

including securities, with an estimated fair value, less cost to sell,

sufficient to recover the recorded investment in the loan, as well as a

reasonable return on that amount. In the process of collection means

that either a collection effort or legal action is proceeding and is

reasonably expected to result in recovery of the loan balance or its

restoration to a current status, generally within the next 90 days.

This policy does not preclude an institution from adopting an

internal classification policy more conservative than the one detailed

above. It also does not preclude a regulatory agency from using the

Doubtful or Loss classification in certain situations if a rating more

severe than Substandard is justified. Loss in retail credit should be

recognized when the institution becomes aware of the loss, but in no

case should the charge off exceed the time frames stated in this

policy.

Partial Payments on Open-End and Closed-End Credit

Institutions should use one of two methods to recognize partial

payments. A payment equivalent to 90 percent or more of the contractual

payment may be considered a full payment in computing delinquency.

Alternatively, the institution may aggregate payments and give credit

for any partial payment received. 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 ($150 shortage times six

payments), or three full months delinquent. An institution may use

either or both methods in its portfolio, but may not use both methods

simultaneously with a single loan.

[[Page 6659]]

Re-aging, Extensions, Deferrals, Renewals, or Rewrites ⁵

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\5\ Certain advertising and marketing programs, like ``skip-a-

payment'' and holiday payment deferral programs are not subject to

this portion of the policy.

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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. Re-

aging of open-end accounts, or extensions, deferrals, renewals, or

rewrites of closed-end accounts should only be used to help borrowers

overcome temporary financial difficulties, such as loss of job, medical

emergency, or change in family circumstances like loss of a family

member. A permissive policy on re-agings, extensions, deferrals,

renewals, or rewrites can cloud the true performance and delinquency

status of the portfolio. However, prudent use of a policy is acceptable

when it is based on recent, satisfactory performance and the true

improvement in a borrower's other credit factors, and when it is

structured in accordance with the institution's internal policies.

The decision to re-age a loan, like any other modification of

contractual terms, should be supported in the institution's management

information systems. Adequate management information systems usually

identify and document any loan that is extended, deferred, renewed, or

rewritten, including the number of times such action has been taken.

Documentation normally shows that institution personnel communicated

with the borrower, the borrower agreed to pay the loan in full, and the

borrower shows the ability to repay the loan.

Institutions that re-age open-end accounts should establish a

reasonable written policy and adhere to it. An account eligible for re-

aging, extension, deferral, renewal, or rewrite should exhibit the

following:

<bullet> The borrower should show a renewed willingness and ability

to repay the loan.

<bullet> The account should exist for at least nine months before

allowing a re-aging, extension, renewal, referral, or rewrite.

<bullet> The borrower should make at least three minimum

consecutive monthly payments or the equivalent lump sum payment before

an account is re-aged. Funds may not be advanced by the institution for

this purpose.

<bullet> No loan should be re-aged, extended, deferred, renewed, or

rewritten more than once within any twelve month period; that is, at

least twelve months must have elapsed since a prior re-aging. In

addition, no loan should be re-aged, extended, deferred, renewed, or

rewritten more than two times within any five-year period.

<bullet> For open-end credit, an over limit account may be re-aged

at its outstanding balance (including the over limit balance, interest,

and fees). No new credit may be extended to the borrower until the

balance falls below the designated predelinquency credit limit.

Examination Considerations

Examiners should ensure that institutions adhere to this policy.

Nevertheless, there may be instances that warrant exceptions to the

general classification policy. Loans need not be classified if the

institution can document clearly that repayment will occur irrespective

of delinquency status. Examples might include loans well secured by

marketable collateral and in the process of collection, loans for which

claims are filed against solvent estates, and loans supported by valid

insurance claims.

The uniform classification and account management policy does not

preclude examiners from reviewing and classifying individual large

dollar retail credit loans that exhibit signs of credit weakness

regardless of delinquency status.

In addition to reviewing loan classifications, the examiner should

ensure that the institution's allowance for loan and lease loss

provides adequate coverage for inherent losses. Sound risk and account

management systems, including a prudent retail credit lending policy,

measures to ensure and monitor adherence to stated policy, and detailed

operating procedures, should also be implemented. Internal controls

should be in place to ensure that the policy is followed. Institutions

lacking sound policies or failing to implement or effectively follow

established policies will be subject to criticism.

Implementation

Changes in this policy that involve manual adjustments to an

institution's policies and procedures should be implemented for

reporting in the June 30, 1999 Call Report or Thrift Financial Report,

as appropriate. Any policy changes requiring programming resources

should be implemented for reporting in the December 31, 2000 Call

Report or Thrift Financial Report, as appropriate.

Dated: February 4, 1999.

Keith J. Todd,

Executive Secretary, Federal Financial Institutions Examination

Council.

[FR Doc. 99-3181 Filed 2-9-99; 8:45 am]

BILLING CODES FRB: 6210-01-P (25%); FDIC: 6714-01-P (25%); OTS: 6720-

01-P (25%); OCC: 4810-33-P (25%)