Press Releases
Press Release
For Immediate Release July 6, 1998

Federal Bank Regulators Issue Proposed Policy
For Uniform Retail Credit Classifications

WASHINGTON, D.C. -- Federal bank regulators today issued proposals for retail credit classification policies and asked for public comments on two time-frame options for classifying retail loans. The policies would guide banks and bank regulators in classifying a consumer loan that is not being repaid under its original terms.

The Uniform Retail Credit Classification Policy proposals, which were published in today's Federal Register, would update the classification policy for open-end and closed-end credit that was issued in 1980. Under the existing policy, open-end credit, like credit cards, is charged off after a 180-day delinquent period or after seven consecutive unpaid bills; closed-end credit, like installment loans, is charged-off after a loan is delinquent for 120 days.

The regulators are seeking specific comments on two alternative options for classifying open-end and closed-end retail loans. Option one would charge off delinquent retail loans if they are past due 150 days or more from the contractual due date. Option two, which is similar to the existing policy, would charge off delinquent closed-end retail loans that become past due 120 cumulative days and delinquent open-end retail loans that become past due 180 cumulative days.

Under both options, closed-end and open-end retail loans would continue to be classified "substandard" once they become 90 days past due. A delinquent loan need not be classified, however, if an institution can clearly document that the loan is well-secured and in the process of collection.

Delinquency is used to classify retail credit because of the presumption that delinquent loans display serious weaknesses that, if uncorrected, are likely to cause the financial institution to suffer a loss of either principal or interest. The evaluation of small retail credit balances on a loan-by-loan basis is inefficient and burdensome.

The federal bank regulators are proposing the following new guidance:

  • Unsecured loans to borrowers who subsequently declare bankruptcy should generally be charged off by the end of the month in which the creditor receives notification of filing from the bankruptcy court, or within the charge-off time frames adopted in the classification policy, whichever is shorter.
  • Secured and partially secured loans to borrowers who declare bankruptcy should be evaluated for repayment potential. Any loss should be charged off within 30 days of notification of filing from the bankruptcy court, or within the charge-off time frames adopted in the classification policy, whichever is shorter.
  • Fraudulent loans should be charged off within 90 days of discovery.
  • In cases where the borrower dies, loans should generally be charged off when the bank determines the amount of loss or within the charge-off time frames, whichever is shorter.
  • One-to-four-family residential real estate loans and home equity loans that are delinquent 90 days or more and with loan-to-value ratios greater than 60 percent should be classified "substandard."

The proposed policy also details criteria that must be met before banks and thrifts may consider a delinquent open-end account current, such as the process of account re-aging, and to extend, defer and rewrite delinquent closed-end loans.

The changes are being proposed by the federal regulatory agencies--the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision--working together as members of the Federal Financial Institutions Examination Council (FFIEC).

Comments are due within 60 days. They should be sent to Executive Secretary, FFIEC, 2100 Pennsylvania Ave., N.W., suite 200, Washington, DC 20037; or by fax to (202) 634-6556.