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 Expanded Guidance for Subprime Lending Programs . The expanded guidance, which supplements previous subprime lending guidance issued on March 1, 1999, is intended to strengthen the examination and supervision of institutions with significant subprime lending programs.

The guidance principally applies to institutions with subprime lending programs that equal or exceed 25 percent of an institution's Tier 1 regulatory capital. For purposes of this guidance, "subprime lending" refers to programs that target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, or bankruptcies. Such programs may also target borrowers with questionable repayment capacity evidenced by low credit scores or high debt-burden ratios.

The expanded guidance:

• Specifies borrower characteristics that may indicate an institution is targeting the subprime lending market;
• Clarifies the standards to use when evaluating the adequacy of the allowance for loan and lease losses (ALLL);
• Establishes a case-by-case framework for evaluating capital adequacy;
• Discusses examination procedures for assessing the quality of subprime loan portfolios; and
• Identifies potentially predatory or abusive lending practices that safety and soundness examiners will criticize.

While this guidance is intended to assist examiners in their evaluation of subprime lending programs, we are also distributing it to insured banks and thrifts so that institutions engaging in subprime lending activities are aware of the banking agencies' expectations regarding risk management processes, allowance for loan loss levels, and capital adequacy.

The agencies recognize that responsible subprime lending can expand credit access for consumers and offer institutions the opportunity to earn attractive returns. However, institutions are expected to recognize both the elevated risk levels posed by participation in subprime lending programs and the enhanced risk management standards needed to successfully engage in this activity.

For more information, please contact your FDIC Division of Supervision Regional Office or Serena Owens, Examination Specialist, at (202) 898-8996.

Michael J. Zamorski

Acting Director

Attachment: 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).