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Credit Card Activities Manual

Detailed Table of Contents

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Section     Description Page
I. Introduction 32k
About the Manual 09
 
II. Credit Cards – General Overview 75k
What is a Credit Card 10
Industry History 10
Card Types and Attributes 11
General Purpose Credit Cards 12
Standard Credit Card Programs 12
Premium Credit Card Programs 12
Affinity Credit Card Programs 12
Co-branded Credit Card Programs 12
Corporate Credit Card Programs 13
Home Equity Credit Card Programs 13
Cash-Secured Credit Card Programs 13
Proprietary Credit Cards 13
Cash-Access Credit Cards 14
Other Types of Bankcards 14
 
III. Identifying Involvement in Credit Card Activities 77k
Credit Card Specialty Banks (CCSBs) 15
Rent-a-BINs 15
Acquiring Bank 16
Agent 17
CEBA Credit Card Banks 17
Securitizing Bank 17
Other 17
Resources 17
 
IV. Credit Card Program Development 83k
Planning 19
Risk Assessment 20
Subprime Lending 20
Management Expertise and Staffing Needs 20
Laws, Regulations, and Other Guidance 20
Committees 21
Policies and Procedures 21
Information System Needs 22
Audits and Internal Controls 23
Testing and Product Roll Out 23
 
V. Marketing and Acquisition 136k
Marketing Channels 24
Conventional Mail Delivery 24
Online Methods 24
Outbound Telemarketing 25
Television 25
Print Ads 25
Special Event / In-Person Promotions 25
"Take One" Promotions 25
Marketing and Acquisition Methods 26
Pre-Approved Solicitations 26
Application Strategies 27
Portfolio Purchases 28
Fair and Accurate Credit Transactions Act of 2003 (FACT Act) 28
Balance Transfer and Promotional Rate Marketing 28
Credit Availability and Card Utility 29
Adverse Selection 29
Product Differentiation 30
Testing 30
Marketing Indices 31
Segmentation Methods 31
Product Line 31
Geographic Location 31
Vintage 32
Acquisition Method and Marketing Channel Method 32
Other Methods and Combinations 33
Summary of Examination Goals – Marketing and Acquisition 33
 
VI. Purchased Portfolios and Relationships 87k
Portfolio Acquisitions 34
Purchased Credit Card Relationships 35
Accounting 35
Capital Limitations for PCCRs 36
Valuation Requirements 37
Fair Value Limitation 37
Tier 1 Capital Limitation 37
Tier 1 Capital Sub-limit 37
Loan Loss Allowances for Purchased Portfolios 37
Summary of Examination Goals – Purchased Portfolios and Relationships 39
 
VII. Underwriting and Loan Approval Process 132k
General Underwriting Considerations 40
Program-Specific Underwriting Considerations 41
Affinity and Co-Branding Programs 41
Private Label Programs 42
Corporate Card Programs 42
Subprime Credit Card Programs 42
Home Equity Credit Card Programs 43
Cash Secured Credit Card Lending 44
Purchased Portfolios 44
Comparison of Automated and Judgmental Processes 45
Credit Bureau Preferences 45
Post-Screening 46
FACT Act 46
Multiple Accounts 46
Initial Credit Line Assignments 47
Policy and Underwriting Exceptions 47
Indices and Reporting 48
Summary of Examination Goals – Underwriting and Loan Approval Process 49
 
VIII. Scoring and Modeling 173k
Types of Scoring 52
FICO Scores 52
VantageScore 54
Other Scores 54
Application Scoring 54
Attrition Scoring 54
Bankruptcy Scoring 55
Behavior Scoring 55
Collection Scoring 55
Fraud Detection Scoring 55
Payment Projection Scoring 55
Recovery Scoring 56
Response Scoring 56
Revenue Scoring 56
Dual-Scoring Matrix 56
Credit Scoring Model Development 56
Basel Considerations Regarding Credit Scoring 58
Validation 58
Cut-off Score 61
Validation Charts and Calibration 61
Overrides 62
Credit Scoring Model Limitations 63
Automated Valuation Models 64
Summary of Examination Goals – Scoring and Modeling 64
 
IX. Portfolio Management 329k
Risk Management 66
Account Management Guidance 67
Account Management 67
Scoring 69
Minimum Payments and Negative Amortization 69
Payment Deferral Programs 72
Pre-Payment Programs 72
Credit Line Management 73
Initial Credit Line Assignment 73
Credit Limit Increases 73
Credit Limit Decreases 74
Multiple Credit Lines 75
Authorizations 75
Renewals 76
Customer Service 76
Consumer Complaints and Litigation 76
Closures and Retention 76
Collections (General) 77
Over-limit Accounts 78
Delinquent Accounts 80
Partial Payments 81
Non-Accrual 82
Re-aging 82
Re-pricing 84
Repayment Plans 85
Workout Programs 85
Temporary Hardship Plans 86
Consumer Credit Counseling Service (CCCS) Plans 86
Settlement Agreements 86
Charge-offs 87
Post-Mortem 88
Recoveries 88
Fraud 89
Reporting and Tracking 89
Segmenting 90
Dollars and Units 90
Levels, Trends, and Performance 91
Key Indices 91
Projected Versus Actual Performance 91
Peer Comparisons 91
Ownership and Clarifying Information 91
Common Reports 91
Summary of Examination Goals – Portfolio Management 94
 
X. Transaction Testing 75k
Reasons for Conducting Transaction Testing 96
Testing Methods 96
Judgmental 96
Statistical 97
Sampling Concepts 97
Population Selection 97
Sample Design and Selection 98
Sample Review 98
Evaluation and Interpretation of Results 99
Summary of Examination Goals – Transaction Testing 99
 
XI. Adverse Classifications 66k
Delinquency Thresholds 100
Examiner Discretion 101
Subprime Loans 102
Mutually Exclusive Figures 102
Special Mention 103
Summary of Examination Goals – Adverse Classifications 103
 
XII. Allowances for Loan Losses 209k
Accounting Guidance 105
Regulatory Guidance 106
Comparison to Budgeted Losses 107
Expectations for Written Allowance Policies 108
Methodologies 108
Roll-Rate Models 108
Average Charge-Off Method 111
Vintage Analysis 111
Regression Analysis 112
Portfolio Liquidation Method (or Payment Turnover Method) 112
Considerations to Accompany the Methodology 112
Ratio Analysis 113
Layering 114
Ownership Interests 114
Settlements 114
Purification and Allowances for Interest and Fees 114
Unallocated Allowances 115
Allowances for Unfunded Loan Commitments 115
Validation 116
Summary of Examination Goals – Allowances for Loan Losses 116
 
XIII. Asset Quality Considerations 52k
Summary of Examination Goals – Asset Quality Considerations 119
 
XIV. Credit Card Issuing Rent-a-BINs 167k
Rent-a-BIN Models and Structures 120
Responsibilities of Bank Management 121
Risks 122
Legal, Compliance, and Reputation Risks 122
Counterparty Risk 123
Funding Risk 123
Credit Risk 124
Operational Risk 124
Risk-Mitigating Controls 124
Policies 124
Due Diligence 125
In-House Expertise 125
Contracts 126
Financial Reporting 126
Covenants and Parameters 127
Access to Information 127
Materials and Program Control 127
Settlement Exposure Reserves (Collateral Protection) 128
Pricing 129
Ability to Terminate Contract 129
Audit 129
Contingency Planning 130
Ability to Cease Authorizations 130
Risk Measurement Systems 131
Partner's Other Relationships with the Bank 131
Capital 131
Accounting 132
Summary of Examination Goals – Credit Card Issuing Rent-a-BINs 132
 
XV. Liquidity 99k
Similarities to Other Banks 134
Funds Management Policies 134
Contingency Funding Plan 135
Cash Flows for Credit Card Lending 135
Inter-Company Relationships 136
Brokered and Rate Sensitive Deposits 137
Securitization 137
Asset Management 139
Funding Concentrations 139
Rent-a-BINs 139
Summary of Examination Goals - Liquidity 140
 
XVI. Earnings 115k
Pricing 141
Interest and Fee Income 142
Noninterest Income 143
Interest Expense 143
Noninterest Expense 143
FAS 91 144
Competition 144
Growth Environment 145
Management Reporting, Budgeting, and Strategic Planning 145
Capital Support 145
Quality of Earnings 146
Key Financial Indices Concerning Profitability 146
Consideration of Securitizations and Issuing Rent-a-BINs 146
Summary of Examination Goals - Earnings 147
 
XVII. Sensitivity to Market Risk 97k
Joint Agency Policy Statement on Interest Rate Risk 149
IRR Considerations Specific to Credit Card Lending 149
Consumer Behavior 151
Minimum Payment Considerations 151
Contractual Interest Rate Ceilings and Floors for Adjustable-Rate Items 151
Securitization Considerations 151
Hedging Strategies and Products 152
Summary of Examination Goals – Sensitivity to Market Risk 152
 
XVIII. Capital 149k
Basel Capital Accords 153
Basel II Framework 153
IRB Systems for Retail Credit Risk 154
Revisions to Basel I 155
Assets 155
Subprime Credit Card Loans 156
Earnings and Dividends 157
Funds Management 157
Securitization 158
Capital Treatment of Recourse Arrangements, Direct Credit Substitutes, and Residual Interests 158
Low-Level Recourse Exposure Rule 159
Implicit Recourse 159
Accrued Interest Receivable (AIR) 159
Contingent Liabilities 160
Reserving for Rebate Programs 160
Quality of Management 160
Risk Diversification 161
Operating Procedures and Controls 161
Capital Models 161
Quantitative Measurements 161
Summary of Examination Goals – Capital 162
 
XIX. Merchant Processing 278k
Transaction Process Overview 164
Risks Associated with Merchant Processing 166
Credit Risk 167
Transaction Risk 167
Liquidity Risk 167
Compliance Risk 168
Strategic Risk 168
Reputation Risk 168
Management 168
Capital 169
Merchant Underwriting 170
Merchant Review and Approval 170
Principals 171
MATCH 171
On-Site Inspection 171
Products and Marketing 171
Merchant Agreements 173
Periodic Review 173
Internet Merchants 173
Pricing 174
Pricing Components 174
Discount Rate 174
Interchange Fees 175
Processing Fees 175
ISO/MSP Fees 175
Agent Bank Commission 175
Other Income 175
Monitoring Pricing 175
Profitability Analysis 176
Fraud Monitoring 176
Fraud Detection Methods 176
Fraud Investigations 177
Charge-back Processing 178
Charge-back Transaction Flow 178
Charge-back Monitoring 178
Risk Mitigation for Charge-backs 179
Accounting for Charge-backs 179
Acquiring Rent-a-BINs 179
Third Parties 180
Contractual Considerations 182
Association Requirements Regarding Third Parties 182
Agent Banks 183
Loans to Third-Party Organizations 184
Contingency Planning 184
Cardholder Information 184
Correspondence with the Associations 184
Summary of Examination Goals – Merchant Processing 185
 
XX. Third-party Relationships 125k
Outsourcing 186
Risk Considerations 187
Due Diligence 189
Contracts 189
Oversight Program 191
Contingency Planning 191
Information Security / Safeguarding 192
Outsourcing to Foreign Service Providers 192
Outsourcing to Affiliated Entities 192
Association Requirements 192
Examination and Investigation of Unaffiliated Third-Party Servicers 193
Affinity, Co-branding, and Corporate Card Arrangements 193
Retail Partners 194
Summary of Examination Goals – Third-Party Relationships 194
 
XXI. Glossary 162k
 
XXII. Appendices
A. Credit Card Pre-Examination Request List 261k 209
B. Merchant Processing Examination Tools 137k 226
     
Product and company names used herein may be trademarks of their respective owners. For example, Fair Isaac, FICO, and FICO Expansion are trademarks or registered trademarks of Fair Isaac Corporation. Mention of product and company names within this manual does not represent or constitute endorsement of any such product or company.
 



Last Updated 04/30/2007 supervision@fdic.gov