[Federal Register: September 12, 1997 (Volume 62, Number 177)]

[Notices]

[Page 48089-48092]

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

[DOCID:fr12se97-61]

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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL

Uniform Retail Credit Classification Policy

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Notice and request for comment.

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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

basis.

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.

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: 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.

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. 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

status?

(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

applied?

(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

consideration:

(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

value.

(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

be?

(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

Council.

[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