Federal Financial Institutions Examination Council
|For Immediate Release||June 12, 2000|
Federal Bank and Thrift Regulators Issue Revised Retail Credit Policy
Federal bank and thrift regulators today issued a revised policy to guide institutions when they classify or write off delinquent retail loans and lines of credit. The Uniform Retail Credit Classification and Account Management Policy, published in today's Federal Register, revises the policy that was issued on February 10, 1999.
The action comes in response to numerous comments and requests for clarification of the standards from the industry and consumer groups. In general, the revised policy provides banks and thrifts additional flexibility in working with borrowers experiencing temporary problems in repaying their consumer loans, including open-end accounts such as credit card balances, and closed-end loans that have fixed maturities such as installment loans. It also emphasizes that the frequency of extensions, renewals, and deferrals must be prudently limited and based on both the borrower's ability and willingness to repay.
The revised policy does not preclude an institution from adopting a more conservative policy. Similarly, examiners are not precluded from classifying retail credit loans that exhibit signs of credit weakness or portfolios for which underwriting standards are weak and present unreasonable credit risk.
The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision working together as members of the Federal Financial Institutions Examination Council (FFIEC) adopted the policy. Institutions should implement the revised policy so that its effect will be reflected in their December 31, 2000 Call or Thrift Financial Report.
The primary modifications to the policy include:
Re-aging, extensions, deferrals, renewals, and rewrites of retail credits - The 1999 policy provided common standards for re-aging - the process of bringing past due accounts to current status - of open-end credits, 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 is more reflective of industry practice.
For both open-end and closed-end credits, the revised standards require the borrower to demonstrate willingness and ability to repay the loan. The revised policy retains the once-in-twelve-months/twice-in-five-years limitation on re-aging open-end loans. 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. The policy also emphasizes the need for comprehensive and effective risk management, reporting, and internal controls related to these practices.
Workout Programs - The 1999 policy did not allow for additional re-aging of accounts that enter into a workout program. Typically, these programs represent 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 has entered into such a 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-twelve-months/twice-in-five-years limitation.
Residential Real Estate Loans - The February 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 required to be charged off. In response to industry concerns, the revised policy provides for the same treatment of both closed-end and open-end loans secured by one- to four-family residential real estate. A collateral assessment and charge-off is required when the loan is 180 days past due.