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Financial Institution Letter

Guidance on Subprime Lending

SUBJECT: Interagency Guidelines on Subprime Lending 

The Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision have jointly issued the attached Interagency Guidelines on Subprime Lending. These guidelines remind banks of the risks inherent in subprime lending and outline the types of controls the agencies expect banks to have in place before entering this field of lending. 

Subprime lending is a high-risk activity. A number of institutions have suffered losses attributable to ill-advised or poorly structured subprime lending programs. In particular, many institutions entering the subprime lending business have discovered that they grossly underestimated the default rates and collection costs associated with these loans. Furthermore, several experienced non-bank subprime specialists have suffered material losses in recent months despite their considerable expertise in this field. Because an economic downturn will tend to adversely affect subprime borrowers earlier and more severely than standard-risk borrowers, management should carefully consider whether it is prudent to begin or expand a subprime lending program at the current stage of the economic cycle. 

Institutions should recognize the additional risks inherent in this activity and determine if these risks are acceptable and controllable given the institution's staff, financial condition, size and level of capital support. In light of the higher risks associated with this type of lending, the agencies may impose higher minimum capital requirements on institutions engaging in subprime lending. If the risks associated with this activity are not properly controlled or the bank's capital level is inadequate given the magnitude of risk assumed, the institution's subprime lending program may be considered unsafe and unsound. 

For more information, please contact your Division of Supervision Regional Office.

James L. Sexton



Attachments: Interagency Guidance on Subprime Lending 

Distribution:   FDIC-Supervised Banks (Commercial and Savings) 

NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street NW, Room 100, Washington, DC 20434 (800-276-6003 or (703) 562-2200). 

Last Updated: April 11, 2001