FDIC Federal Register Citations

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Communications Division
Office of the Comptroller of the Currency
250 E Street SW
Third Floor, Mail Stop 1-5
Attention: 1557-0081
Washington, D C 20219

Ref: Consolidated Reports of Condition and Income 1557-0081

Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, D C 20551

Ref: Consolidated Reports of Condition and Income 7100-0036

Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
Attention: Comments/ Legal Division
550 17th Street, NW
Washington, D C 2042

Ref: Consolidated Reports of Condition and Income 064-0052

RE: Proposed Agency Information Collection Activities for the "Call Report"; Comment Request - Vol.67, No. 134 Federal Register July 12, 2002

Gentlemen and Ladies:

This letter is submitted on behalf of Wachovia Corporation and its subsidiary companies, including Wachovia Bank, National Association, d/b/a First Union National Bank; Wachovia Bank of Delaware, National Association, and Atlantic Savings Bank, FSB (collectively referred to as "Wachovia").
On July 12, 2002, the Federal Financial Institutions Examination Council (hereafter "Agencies") published proposed revisions to Consolidated Reports of Condition and Income ("Call Report") for banks and the Thrift Financial Report ("TFR") for savings associations ("Proposal"). The Proposal revises a previous proposal, issued May 31, 2000, relating to the reporting of subprime loans. At that time, Wachovia supported the comment to a large degree, but suggested that reporting be limited to loans retained in portfolios designated by the lender as "subprime." Wachovia also recommended that the agencies provide a definition of subprime loans that allows flexibility based on the specifics of the loan programs, the size of the financial institution, and level of risk that the financial institution is willing to tolerate.

Wachovia does not believe that our current lending programs constitute traditional subprime lending. On occasion, if appropriate compensating factors are present, we will provide credit to individuals who, at the time of loan origination, are outside of our standard underwriting criteria and may exhibit one or more attributes that might be associated with subprime lending. However, at the time of underwriting, Wachovia, because of the compensating factors, has no expectation of materially high default risk in these loans.

Wachovia appreciates the opportunity to offer these comments and applauds the thoughtful approach that the regulatory Agencies have given to the subprime lending issue, given that many American consumers need this service to participate in the economic benefits of credit access. And, like the Agencies, Wachovia is deeply committed to the safety and soundness of our industry.
While the Agencies have addressed many of the issues that Wachovia raised in its comment letter dated July 31, 2000, Wachovia continues to have serious concerns with the Proposal, particularly with the definition of "subprime" loan programs.
Subprime Lending Definition - General Comments

In a "Guidance on Supervision of Subprime Lending," NR 2001-12, January 31, 2000 ("Guidance"), the Agencies identified the credit characteristics of borrowers who were most likely to participate in subprime loan programs:

  · Two or more 30-day delinquencies in the last 12 months, or

  · One or more 60-day delinquencies in the last 24 months;

  · Judgment, foreclosure, repossession, or charge-off in the prior 24 months;

· Bankruptcy in the last 5 years;

· Relatively high default probability as evidenced by, for  example, a credit bureau risk score (FICO) of
   660 or below (depending on the product/collateral), or other bureau or proprietary scores with an
   equivalent default probability likelihood; and/or

· Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living
   expenses after deducting total monthly debt-service
   requirements from monthly income.

The Guidance is intended to assist examiners in identifying subprime loan programs. Wachovia is concerned that examiners may use the characteristics listed in the Guidance to require financial institutions to re-classify portfolios and loan programs as "subprime" when they should be considered as "prime" programs that impose no significant risk to the financial institution. Wachovia submits that, while the list of characteristics may be an appropriate investigative tool, the list is too broad to be useful to financial institutions to subprime loan programs.

The existence of one or more of these characteristics within a loan program is not conclusive of subprime lending. Each financial institution's concept of subprime lending will vary, based on its customer population and threshold for risk. For example, a 600 FICO score in a portfolio of one financial institution may, in fact, be an acceptable risk compared to another lender's required minimum of 660. Financial institutions must be allowed to select and validate credit criteria based on risk and actual loss results, without regard to an artificial standard that may classify its loans as subprime.

Wachovia is concerned that recent trends fail to distinguish subprime lending which, when properly managed, not only has a legitimate place in the consumer-lending environment, but also avoids abuses which arise in "predatory" lending. In this connection, Wachovia supports well-reasoned reform efforts to prevent predatory lending.

We are also concerned that the proposed changes to the Call Report may require financial institutions to place what traditionally have been regarded as prime loans into subprime reporting categories. Should new regulations or administrative actions result in public disclosure of such information, financial institutions will suffer increased reputational and litigation risks relating to subprime lending practices. This may also trigger the unintended consequence of making credit less available to certain categories of consumers.

Wachovia recommends that the Agencies amend the proposal to allow financial institutions broad discretion to self-identify subprime loan programs and portfolios. To that end, Wachovia recommends the following changes to the Proposal:

Determination of subprime loan programs; discretionary authority

Wachovia recommends that financial institutions have full discretion to self-identify subprime loan programs. Examiners should be instructed that the existence of a loan program, whether identified by type, collateral or delivery channel, which bears one or more of the characteristics outlined in the Guidance, shall not be presumptive of the existence of a subprime program or of an erroneously prepared Call Report.

Wachovia believes that financial institutions must have the authority to determine which of its programs are subprime. For example, some mortgage loans may be decisioned based on secondary market guidelines, while other mortgage loans are decisioned using a sophisticated combination of custom score, bureau score, loan-to-value ratio, debt-to-income ratio, prior customer relationships, and other factors. In some instances, loan programs may permit one or more of the characteristics described in the proposed guidelines. Loan programs that do not meet the institution's usual and customary underwriting criteria for the product and line of business, without additional compensating factors, may be considered subprime loans. However, this will vary from institution to institution, based on loan programs, institution size, and tolerance for risk.

Wachovia believes that while some consistency is appropriate to allow the Agencies to evaluate financial institutions fairly, the individual financial institution must be permitted to decide whether or not there is a sufficient number of subprime loans in a loan program to designate such a program as subprime.

Use of Credit Score

Use of a FICO score alone should not be a characteristic that may be applied to determine whether or not a product or a portfolio is subprime. While a 660 FICO score may be considered by an examiner as one benchmark of potential subprime lending, Wachovia believes that a particular credit score is not conclusive of a subprime loan program. Many secondary market lenders, and traditional lenders with sophisticated credit evaluation programs, will accept FICO scores below 660 for prime lending programs. Regular performance evaluations and risk assessments often yield loan portfolios that perform well within acceptable industry measures of profitability.

Wachovia is concerned that if the 660 FICO score becomes the credit score benchmark to determine "subprime" lending programs, financial institutions that use lower FICO cut-off scores in their prime lending programs may be deemed to have reported loans erroneously. Moreover, if financial institutions choose not to consider loan programs with lower cut-off scores as subprime lending programs, they may be deemed to have misled the Agencies and, ultimately, the public.

Wachovia believes that a 660 FICO score is too high, as either a benchmark or a guide for examiners. Wachovia recommends that the FICO threshold be lowered significantly or removed entirely as a benchmark for reporting loan programs as subprime on the Call Report. Instead, financial institutions should be permitted to use overall performance factors within a loan portfolio to determine when a particular loan program should be considered subprime.

Additional Exemptions from Reporting

The stated purpose of the proposal is to provide the Agencies with another tool by which they might judge the safety and soundness of a financial institution and with which they can further scrutinize what may be subprime lending programs.

Wachovia agrees that the amended Call Report may assist examiners in reviewing the soundness of a financial institution's consumer lending portfolio. We strongly believe, however, that increased reputational risks are presented if merely reporting subprime loans is equated to the existence of predatory lending practices. The availability of subprime loans to that segment of the borrowing public whose credit history and capacity qualifies them for such products provides significant convenience and value to that segment of consumer borrowers. If the purpose of the amended Call Report is to identify weakness in consumer loan portfolios, the following loan programs should be exempt from the new Call report requirements:

1. Loans that will be sold to or are otherwise insured or guaranteed by an agency of the federal or state government programs should be exempt from subprime definitions or reporting. Loans meeting these criteria are not a risk to the financial institutions and should not be placed as a risk on the Call Report.

2. Loans that have been validated through risk-based application systems such as DACCS™ or Desktop Underwriter™ should be exempt if the lender does not alter the approval criteria.

Confidential treatment for a limited time period

Wachovia appreciates the Agencies' sensitivity to resolution of problems that normally accompany new disclosure, and supports the Agencies' recommendation that the information collected in the revised Call Report remain confidential until new rules governing disclosure have been promulgated. This will allow institutions to make necessary changes to systems and processes to collect this data without creating an additional risk that third parties reviewing such reports may misunderstand the data.

Delayed Implementation

Wachovia recognizes the Agencies' desire to obtain the information in the Proposal at the earliest possible opportunity. The collection of information required for the Call Report may require installation of or adjustments to data collection operations, internal reporting systems, and reporting methods. Moreover, it is difficult to determine the system and personnel costs that will be associated with installation of the required changes. Wachovia recommends that the Agencies permit a period of one full year from the date of the publication of the final requirements before financial intuitions be required to make changes to the Call Report. This allows adequate time for identification of subprime loan programs according to published definitions, systems installation or reprogramming, and testing before Call Reports are submitted to the Agencies.

Wachovia commends the Agencies for their willingness to make changes to the proposal and appreciates the opportunity to comment on the revised reporting requirements.

Very truly yours,
Michael A. Watkins
Senior Vice President and
Deputy General Counsel
Wachovia Corporation
Charlotte, NC