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FDIC Federal Register Citations

September 16, 2002

Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, N.W.
Washington, D.C. 20551
By facsimile: (202) 452-3819 and. e-mail:
Re: Consolidated Reports of Condition and. Income, 7100-0036

Communications Division
Office of the Comptroller of the Currency
250 E. Street, S.W.
Public Information Room Mailstop 1-5
Washington, D.C. 20219
Attention: 1557-0081
By facsimile: (202) 874-4448 and e-mail: regs.comments

Mr. Robert E. Feldman, Executive Secretary 
Attention: Comments/Legal Division
Federal Deposit Insurance Corporation
550 17th Street, N. W.
Washington, D.C. 20429
By facsimile: (202) 898-3838 and e-mail: 
Re: Consolidated, Reports of Condition and Income, 3064-0052

Re: Proposed Agency Information Collection Activities: Revisions of the FFIEC Call Reports:

Ladies and. Gentlemen:

J.P. Morgan Chase & Co. ("JPMorgan Chase") welcomes the opportunity to comment on the proposed revisions ("the Proposal'I to the Consolidated Reports of Condition and Income ("Call Report") issued jointly by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal. Deposit Insurance Corporation and the Office of Thrift Supervision (collectively, the "Agencies").1

In September 2000, JPMorgan Chase commented on the prior proposal of the Agencies to require lenders with subprime lending programs to include the amount of that lending in. their Call Reports. JPMorgan Chase's comments generally are similar to those expressed in the September 2000 letter. This letter will summarize JPMorgan Chase's major concerns.

General Comments

Failure to Enhance Regulatory Oversight. JPMorgan Chase opposes the proposed reporting requirement on subprime lending because we believe that it would result in significant reporting and regulatory burdens without enhancing current supervisory oversight. In fact, the ambiguities in the proposed reporting of subprime loans could have the contrary effect of creating inconsistent reporting among institutions, thereby undermining the integrity of the Call Report: as a data source.

The Agencies justify the proposed collection of subprime lending data in part by stating that the information would, be the "sole source of off-site data on subprime lending programs." The recent revisions to the Home Mortgage Disclosure Act, however, will provide an enormous amount of information on subprime mortgage loans because the pricing of those loans, which is generally higher than that of prime loans, will be reported. and their status under the Home Owner's Equity Protection Act: ("HOEPA") will be identified.. Rather than requiring additional. reporting on the Call Report reflecting inconsistent treatment of these loans across institutions, we believe that the consistent categorization afforded by HOEPA--a statute directly intended to address this market segment-- is a far more appropriate way for the Agencies to keep abreast of the subprime lending of the banks that they examine.

Regulatory Burden on Many Banks to Capture Information on a Few. The Proposal will require banks with any subprime lending programs (as defined by the institutions) to report the total dollar amount of their outstanding loans. Banks whose total dollar amount outstanding on their subprime lending is equal to greater than 25% of Tier 1 capital will be required to report additional information, such as a breakdown of subprime loans by loan type, a breakout of past due and, nonaccrual subprime loans and separate reporting of subprime charge-offs and recoveries. We are pleased that the Agencies have attempted to minimize the reporting burden on banks by structuring the Proposal to eliminate some reporting for banks whose subprime outstandings fall below the 25% threshold. However, we believe that requiring banks to report subprime loan outstandings will be especially onerous on large institutions. As we suggested in our prior comment letter, we believe that well capitalized banks should be entirely exampt because they are much less likely to warrant scrutiny compared to a company where residual interests in securitized assets constitute a major component of its net worth.

The Agencies indicated in the earlier proposal that they estimate the number of insured subprime lenders to be about one percent of all insured institutions. We are perplexed by the Agencies' justification of the proposed implementation of new reporting requirements on the basis that they affect only a relatively small number of institutions. The increased reporting burden faced by large institutions raises serious reporting issues, especially if the Agencies implement a 30-day reporting deadline.

Instituting a massive reporting process (even if it were capable of effectively raising red flags) is not the most effective or efficient way to address underlying problems with this small group about whom the Agencies have potentially legitimate concerns. If the Agencies' overall goal is to minimize risk arising from this activity, then we believe that the best way to accomplish this is to examine, on an individual portfolio basis, the specific and sometimes unique credit standards and controls that institutions have in place for various portfolios of loans in specific product and price categories, including categories that might generally be perceived to be "subprime." This is precisely the approach taken by the Expanded Guidance for Subprime Lending Programs published in January 2001.

Timing of Initial Reporting. The Agencies intend to require reporting of subprime consumer lending programs beginning with the March 31, 2003 Call Report. We believe that if the Agencies adopt the Proposal, the June 30, 2003 Call Report is a more appropriate starting date. The Agencies seem to assume that banks may easily systemically separate subprime lending  from other lending and that the Call Reports will be accurate. Banks, however, may not have automated systems in, place to accomplish this and may be forced, if the effective date is set too early, to report based on, error-prone manual processes. Even in an automated process, programming changes will be necessary to accomplish the reporting, programming changes need to be tested for accuracy and employees in the lines of business, audit and compliance areas will need to be trained. For these reasons, we strongly suggest that the earliest start date be the June 30 Call Report.

Comments on Specific Elements of the Proposal

The Definition of Subprime Loan - JPMorgan Chase appreciates the Agencies' efforts to provide banks with a certain degree of latitude in determining for themselves whether they have subprime lending programs and to balance this with a list of characteristics of subprime loans that banks may use as a basis for making such a determination. We strongly believe, however, that the list of characteristics of subprime loans bears little relation to actual characteristics of subprime loans and urge the Agencies to reconsider these definitions. There is no single criterion or set of criteria that can be used to consistently identify a loan as subprime. Each line of business has unique criteria and methodologies to determine prospective credit risk driven by the characteristics of the product (e.g., secured versus unsecured), the nature of the origination process (e.g., manual versus systemic), and the data available. As such, no single measure can be used, to gauge risk across lines-of.-business or across institutions.

In particular, we believe that the following characteristics of subprime loans described in the Proposal are far too broad. We believe that the Agencies should revisit these characteristics both in the Proposal and in the source of these characteristics, the Expanded Guidance for Subprime Lending Programs.

Two or more 30 day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months. This pattern, of delinquencies is not uncommon in prime loans that perform well over time and is not a meaningful indicator of subprime status. The restriction is more applicable to mortgage delinquencies than to other types of consumer debt.

Judgment, foreclosure, repossession or charge-off in the prior 24 months. This characteristic would be more appropriate if it were limited to foreclosures and repossessions. Lenders do not consider small judgments and charge-offs in a 24 month period as significant, depending on the totality of. the circumstances.

Bankruptcy in the last five years. In today's environment, this is far too broadly worded. In our mortgage company, for example, an applicant can obtain a prime loan if the bankruptcy is two or more years old, the bankruptcy was based on a life-altering event, and the applicant has re-established good credit. Without a life-altering event, an applicant can obtain a prime loan if the bankruptcy is four or more years old and the applicant has re-established good credit.

Relatively high default prpbability as evidenced, for example, by a FICO score of. 660 or below. A 660 FICO threshold, is unreasonably high and we do not understand why the Agencies chose that as the threshold. Many prime credit card, auto and mortgage borrowers, for example, have FICO scores below 660. Conversely, many of subprime mortgage borrowers have FICO scores above 660. Their loans are prime or subprime, as the case may be, for reasons unrelated to their FICO score. Within each category, there is a broad distribution of FICO scores at the time of origination and there is considerable overlap. We are, therefore, extremely reluctant to give any FICO score threshold. If the Agencies must pick a score, we note that in, the mortgage industry, Fannie Mae in its automated underwriting uses a 620 FICO score as a marker for referring the applicant to a judgmental underwriter and believe that this is a more appropriate score for mortgage applicants than 660.

Debt service-to income ratio of 50% or greater or otherwise limited ability to cover family living expenses after deducting total monthly debt service. Again, a. 50% threshold is not terribly useful in separating prime lending from subprime lending, On prime mortgage loans, for example, Fannie Mae's automated underwriting will routinely approve loans with 50% or higher DTI ratios provided that the LTV is relatively low. On our subprime mortgage loans, only C- and lower credit grades generally permit DTI ratios of greater than 50% (but require a lower LTV). The great majority of our subprime mortgage loans are underwritten to a maximum DTI ratio of 50% or less.

We believe, therefore, that if the Agencies pursue subprime reporting, there ought to be separate definitions of subprime loan depending on the loan category and that the Agencies should consider the possible need for numerous subcategories of loans to accurately differentiate between various types of risk.

Finally, at a minimum, loans that are guaranteed, internal employee accounts, corporate travel and entertainment card accounts, and secured credit card loans should be excluded. These groups of accounts exhibit significantly lower credit risk when compared to other groups of accounts with similar credit profiles.

Necessity of Confidentiality Due to Individual Interpretations of What is a Subprime Program. We believe it is imperative that reporting of subprime loans, if implemented as currently proposed, be entirely confidential. There are unfounded negative inferences of unsafe and unsound or abusive lending that are automatically drawn by outside observers based upon a lender's involvement with subprime lending and these inferences are harmful to all lenders, even those with strong records. In our view, publicizing this information in no way advances supervisory objectives related to safety and soundness. In any event, if the Agencies disagree, confidentiality should be maintained until the Agencies are confident that reporting on these loans runs smoothly.

JPMorgan Chase appreciates the opportunity to provide our views on the Proposal. We would be pleased to discuss our comments with you at your convenience. If we can be of  further assistance on this matter please do not hesitate to contact: Roy J. Leone at (201) 595-5564 or the undersigned.

Sincerely yours,

John M. Nuzum, Jr. 
Senior Credit Executive 
Retail Businesses

1  The subsidiary banks of J.P. Morgan Chase include:  JPMorgan Chase Bank, Chase Manhattan Bank USA, N.A., and J.P. Morgan Trust Company, N.A.

Last Updated 09/20/2002

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