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Supervisory Insights

Winter 2009 Vol. 6, Issue 2 - Table of Contents

Last Updated: May 25, 2023

Supervisory Insights - Winter 2009 - PDF

Letter from the Director


Nowhere to Go but Up: Managing Interest Rate Risk in a Low-Rate Environment

Interest rate risk (IRR) is inherent to banking. However, too much IRR can leave capital and earnings vulnerable to rate changes, particularly for those financial institutions in a weakened financial condition. In light of the current environment, where rates are near historic lows, it is critical that financial institutions maintain a strong and effective IRR management program. This article reviews IRR measurement systems and highlights best practices for measuring, monitoring, and controlling IRR.

Not Just Adding Up the Numbers: Achieving CRA Objectives in Challenging Times

Community Reinvestment Act examination procedures call for examiners to consider the economic circumstances and other constraints faced by an institution and encourage management to adopt innovative responses to community needs. This article explains how examiners should balance concerns about a low volume of loans with the existence of a strong strategic focus on qualitative factors, such as the impact of a lending and community development program that meets particularly challenging community needs.

Regular Features

From the Examiner's Desk: Customer Information Risk Assessments: Moving Toward Enterprise-wide Assessments of Business Risk

The results of information technology examinations often indicate financial institutions struggle with conducting effective customer information risk assessments. Recent phishing attacks are one example of the critical need to safeguard information assets. This article describes three types of risk assessments, identifies areas for improvement often observed by examiners, and discusses the supervisory response to deficiencies.

Update to the From the Examiner’s Desk feature in the Summer 2009 issue of Supervisory Insights

In “Changes to Regulation Z Afford Increased Consumer Protections,” several amendments to Regulation Z were discussed, including the prohibition against making a higher-priced mortgage loan based on the value of the consum- er’s home without considering the borrower’s ability to repay the loan. With respect to a higher-priced mortgage loan with a balloon payment due in less than seven years, the article raised questions about how these loans would be underwritten, given the exclusion from the presumption of compliance, and the creditor’s obligation to consider the borrower’s ability to repay the loan (including the ability to satisfy the final balloon payment).

In response to questions regarding compliance with this underwriting standard, the Federal Reserve Board (FRB) clarified its “ability to repay” requirement as it relates to the balloon payment of a short-term, higher-priced balloon mortgage loan. The FRB clarified that the requirement for a creditor to assess a consumer’s ability to repay a loan is satisfied if the creditor has verified the consumer’s ability to make regular monthly payments and verified that the consumer likely would be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral. Specifically, on November 9, 2009, the FRB issued written guidance to its examin-ers clarifying Regulation Z’s “repayment ability” standard as it applies to balloon mortgage loans. See FRB CA Letter 09-12:

The FRB clarifies: (1) short-term, higher-priced balloon mortgage loans that are prudently underwritten (i.e., based on a consumer’s repayment ability from sources other than the collateral) are not prohibited, (2) a creditor does not have to verify that the consumer has other assets and/or income at time of consummation sufficient to pay the balloon payment when it comes due, and (3) in addition to verifying the consumer’s ability to make regular monthly payments, a creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan (or through income or assets other than the collateral).

Regulatory and Supervisory Roundup

This feature provides an overview of recently released regulations and supervisory guidance.

Supervisory Insights

Supervisory Insights is published by the Division of Supervision and Consumer Protection of the Federal Deposit Insurance Corporation to promote sound principles and best practices for bank supervision.

Sheila C. Bair
Chairman, FDIC

Sandra L. Thompson
Director, Division of Supervision and Consumer Protection

Journal Executive Board

George E. French, Deputy Director and Executive Editor
Christopher J. Spoth, Senior Deputy Director
John H. Corston, Acting Deputy Director
Robert W. Mooney, Deputy Director
Thomas E. Peddicord, Acting Deputy Director
Thomas J. Dujenski, Regional Director
Doreen R. Eberley, Regional Director
Stan R. Ivie, Regional Director
John M. Lane, Acting Regional Director
James D. LaPierre, Regional Director
M. Anthony Lowe, Regional Director
James C. Watkins, Acting Regional Director

Journal Staff

Kim E. Lowry
Managing Editor

Daniel P. Bergman
Financial Writer

John A. George
Financial Writer

Supervisory Insights is available online by visiting the FDIC’s website at To provide comments or suggestions for future articles, request permission to reprint individual articles, or to request print copies, send an e-mail to

The views expressed in Supervisory Insights are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation. In particular, articles should not be construed as definitive regulatory or supervisory guidance. Some of the information used in the preparation of this publication was obtained from publicly available sources that are considered reliable. However, the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation.