UNIFORM RETAIL CREDIT CLASSIFICATION
AND ACCOUNT MANAGEMENT POLICY
June 29, 2000
CHIEF EXECUTIVE OFFICER
FFIEC Revises Uniform Retail Credit Classification and Account Management Policy
The Federal Financial Institutions Examination Council (FFIEC) has revised the Uniform Retail Credit Classification and Account Management Policyissued in 1999. Thepolicy provides guidance to institutions when they classify or write off delinquent retail loans and lines of credit. The revised policy is attached.
The FFIEC revised the policy in response to comments and requests from the banking industry for clarification of the standards. In general, the revised policy provides banks and thrifts additional flexibility in working with borrowers experiencing temporary problems in the payment of their consumer loans.
The revised policy does not bar an institution from adopting a more conservative policy. Based on collection experience, when a portfolio's history reflects high losses and low recoveries, more conservative standards are appropriate and necessary. Nor does the policy preclude examiners from classifying individual retail credit loans that exhibit signs of credit weakness regardless of delinquency status. An examiner may also classify retail portfolios, or segments thereof, where underwriting standards are weak and present unreasonable credit risk, and may criticize account management practices that are deficient.
The primary modifications to the policy include the following:
Re-aging, extensions, deferrals, renewals and rewrites of retail credits - The 1999 policy provided common standards for re-aging open-end credits-the process of bringing past-due accounts to current status-and extensions, deferrals, renewals and rewrites of closed-end loans. The revised policy separates the treatment for open-end and closed-end credits in a manner that more accurately reflects industry practice.
The revised policy retains the once-in-12-months/twice-in-five-years limitation on re-aging open-end loans. Re-agings of open-end loans that occur prior to the December 31, 2000, implementation date do not count toward the once-in-12-months/twice-in-five- years limitation. However, examiners should review an institution's record of re-agings to ensure that the use of this practice was not excessive prior to the implementation date.
For closed-end loans, institutions are required to implement their own explicit standards that limit the number and frequency of extensions, deferrals, renewals and rewrites. In addition, the policy emphasizes the need for comprehensive and effective risk management, reporting and internal controls related to these practices. The agencies also state that banks and thrifts should adopt standards prohibiting additional advances that finance the unpaid interest and fees on these loans.
Workout Programs - The 1999 policy did not allow for additional re-aging of accounts that are placed in a workout program. Workout programs involve a formal agreement between the lending institution, or a third-party debt counseling service, and the borrower to repay the debt.
The revised policy permits institutions to re-age an open-end account that is placed in a workout program after receipt of three monthly payments or the equivalent cumulative amount. Re-aging open-end accounts for workout program purposes is limited to once in a five-year period and is in addition to the existing once-in-12-months/twice-in-five-years limitation on re-aging open-end loans.
Residential Real Estate Loans - The 1999 policy treated open-end and closed-end residential loans differently. For closed-end residential loans, a current assessment of the real estate value and charge-off of the unsecured portion was required at 120 days past due, while open-end credits were allowed 180 days before any unsecured portion of the loan was charged off. In response to industry concerns, the revised policy provides similar treatment for both closed-end and open-end loans secured by one- to four-family residential real estate. A collateral assessment and charge-off will be required when the loan is 180 days past due.
The Uniform Retail Credit Classification and Account Management Policy applies to all FDIC-supervised institutions. Institutions should implement the revised policy so that its effect will be reflected in their December 31, 2000, Call or Thrift Financial Report.
For further information, please contact your Division of Supervision Regional Office or James Leitner, Examination Specialist, at (202) 898-6790.
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).