[Federal Register: July 6, 1998 (Volume 63, Number 128)]
[Notices]
[Page 36403-36408]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[[Page 36403]]
=======================================================================
-----------------------------------------------------------------------
FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
Uniform Retail Credit Classification Policy
AGENCY: Federal Financial Institutions Examination Council.
ACTION: Notice and request for comment.
-----------------------------------------------------------------------
SUMMARY: The Federal Financial Institutions Examination Council
(FFIEC), on behalf of the Board of Governors of the Federal Reserve
System (FRB), the Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and the Office of
Thrift Supervision (OTS), collectively referred to as the Agencies,
requests comment on proposed changes to the Uniform Policy for
Classification of Consumer Installment Credit Based on Delinquency
Status (Uniform Retail Credit Classification Policy). The National
Credit Union Administration (NCUA), also a member of FFIEC, is
reviewing the applicability and appropriateness of the FFIEC proposal
for institutions supervised by the NCUA; however, the NCUA does not
plan to adopt the proposed policy at this time.
The Uniform Retail Credit Classification Policy is a supervisory
policy used by the federal regulatory agencies for the uniform
classification of retail credit loans of financial institutions. At the
time the initial Uniform Retail Credit Classification Policy was issued
in 1980, open-end credit generally consisted of credit card accounts
with small credit lines to the most creditworthy borrowers. Today,
open-end credit generally includes accounts with much larger lines of
credit to diverse borrowers with a variety of risk levels. The change
in the nature of those accounts and the inconsistencies in the
reporting and charging off of accounts has raised concerns with the
FFIEC. This proposed policy statement is intended to help the FFIEC
develop a revised classification policy to more accurately reflect the
changing nature of risk in today's retail credit environment. The FFIEC
is proposing to revise the charge-off policy for closed-end and open-
end credit and address other significant issues in retail credit
lending by the financial services industry. The FFIEC is requesting
comment on the proposed revision and the listed issues.
DATES: Comments must be received by September 4, 1998.
ADDRESSES: Comments should be sent to Keith Todd, Acting Executive
Secretary, Federal Financial Institutions Examination Council, 2100
Pennsylvania Avenue NW., Suite 200, Washington, DC 20037, or by
facsimile transmission to (202) 634-6556.
FOR FURTHER INFORMATION CONTACT:
FRB: William Coen, Supervisory Financial Analyst, (202) 452-5219,
Division of Banking Supervision and Regulation, Board of Governors of
the Federal Reserve System. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Dorothea Thompson, (202)
452-3544, Board of Governors of the Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551.
FDIC: James Leitner, Examination Specialist, (202) 898-6790,
Division of Supervision. For legal issues, Michael Phillips, Counsel,
(202) 898-3581, Supervision and Legislation Branch, Federal Deposit
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
OCC: Cathy Young, National Bank Examiner, Credit Risk Division,
(202) 874-4474, or Ron Shimabukuro, Senior Attorney, Legislative and
Regulatory Activities Division (202) 874-5090, Office of the
Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.
OTS: William J. Magrini, Senior Project Manager, (202) 906-5744,
Supervision Policy; or Vern McKinley, Attorney, (202) 906-6241,
Regulations and Legislation Division, Chief Counsel's Office, Office of
Thrift Supervision, 1700 G Street NW, Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Background Information
On June 30, 1980, the FRB, FDIC, and OCC adopted the FFIEC uniform
policy for classification of open-end and closed-end credit (1980
policy). The Federal Home Loan Bank Board, the predecessor of the OTS,
adopted the 1980 policy in 1987. The 1980 policy established uniform
guidelines for the classification of installment credit based on
delinquency status and provided different charge-off time frames for
open-end and closed-end credit. The 1980 policy recognized the
statistical validity of determining losses based on past due status. At
that time, open-end credit generally consisted of credit card accounts
with small credit lines to the most creditworthy borrowers. Today,
open-end credit generally includes accounts with much larger lines of
credit to diverse borrowers with a variety of credit risk levels. The
change in the nature of those accounts and the inconsistencies in the
reporting and charging off of accounts by financial institutions, has
prompted the federal regulatory agencies to propose several revisions
to the 1980 policy.
Comments Received
The FFIEC requested comment on September 12, 1997 at 62 FR 48089
(September Notice) on a series of questions designed to help the FFIEC
develop a revised classification policy. A total of 61 comments were
received representing the views of 22 banks and thrifts, nine bank
holding companies, eight regulatory agencies, seven trade groups, and
15 other companies and individuals. The following is a summary of the
questions and responses.
1. Charge-off Policy for Open-End and Closed-End Credit
The September Notice requested comment on whether a uniform time
frame should be used to charge off both open-end and closed-end
accounts, and if a change in policy is made, a reasonable time frame to
allow institutions to comply with such a change. Comments were also
sought on whether to continue the current regulatory practice of
classifying open-end and closed-end credit Substandard when the account
is 90 days or more delinquent; whether a standard for the Doubtful
classification or guidance for placing loans on a nonaccrual status
should be adopted; and whether a specific reserve account should be
established.
Charge off policy: Commenters were divided on whether to maintain
the current policy of charging off open-end (credit card) loans at 180
days delinquent and closed-end installment loans at 120 days or to
change the policy to a uniform time frame for both types of loans.
Almost half of the commenters suggested a uniform charge-off time frame
for both types of loans. Recommendations for the charge-off time frame
varied from 90 days to 180 days; the majority who favored uniformity
believed the time frame should be less than 180 days. Of 51 comments to
this question, 22 commenters preferred a stricter open-end standard
than what is contained in the 1980 policy and remaining respondents
supported no change or a less strict open-end standard.
Commenters in favor of a uniform time frame cited three main
reasons: (1) inconsistency in the 1980 policy guidelines; (2) recovery
data supports a lengthening of the charge-off policy for closed-end
installment loans; and (3) the level of credit risk in open-end and
closed-end loans has changed since the 1980 policy was adopted.
[[Page 36404]]
Commenters supporting a uniform time frame cited the inconsistency
between the level of risk associated with credit card loans and closed-
end credit and the inconsistency in the 1980 policy for charging-off
delinquent accounts. Under the 1980 policy, credit card loans, which
generally are unsecured, are charged off when an account is 180 days
delinquent. Conversely, closed-end credits generally amortize according
to a payment schedule, are better protected via a security interest in
collateral, and experience much higher recovery rates after being
charged off, but are subject to a more stringent charge-off policy at
120 days delinquency. Over the years, the inconsistency in the time
frames has become more apparent as the market for credit cards evolved.
Several commenters stated that the risk associated with open-end credit
has increased significantly since 1980. This is due to competition in
solicitations, less stringent underwriting criteria, lower minimum
payment requirements, lack of a security interest, and lower recovery
rates after charge-off. Commenters contended that these factors provide
support for shortening the current 180 day charge-off time frame for
open-end credit.
A uniform time frame would eliminate the inconsistent treatment for
closed-end and open-end credit. On a volume basis, the change would
actually lengthen the charge-off time frame for more loans than it
would shorten. As of year end 1997, institutions supervised by the FRB,
FDIC, and OCC had closed-end installment loans of $338 billion and
open-end credit card loans of $237 billion. At that time, institutions
supervised by the OTS had closed-end installment loans of $29 billion
and open-end loans totaling $23 billion. Under a uniform time frame,
institutions would have an additional month to work with borrowers
before recognizing a loss for lower risk closed-end credit. Credit card
issuers would have this same 150-day charge-off time frame, although it
would be 30 days less than the current requirement.
The most direct measure of credit risk is the ratio of net losses
to loans. In every year since 1984, the credit card loss ratio has been
much higher than the closed-end installment loss ratio. During the
fourteen-year period, the average net loss for credit cards was 3.2
percent while the average net loss for installment loans was 0.8
percent. The percentage of current recoveries to prior year charge-offs
is a ratio that indicates how timely loans are charged-off. A loss
classification does not mean that the asset has absolutely no recovery
or salvage value; rather, it means that it is not practical or
desirable to defer writing off an essentially worthless asset even
though partial recovery may occur in the future. A high rate of
recoveries may illustrate a conservative charge-off policy, whereas a
low rate may indicate an unwarranted delay in the recognition of
losses. Since 1985, recoveries for credit card loans have averaged 19
percent, while recoveries for installment loans have averaged 34
percent.
Commenters opposed to any change of the charge-off standards cited
four principal reasons: (1) the impact on the industry's earnings and
capital; (2) the effect on credit card securitization transactions; (3)
the limitation of programming resources because of Year 2000 issues;
and (4) impact on consumers.
Some commenters believed that changing the charge-off guidelines
for open-end credit may make it more difficult for lenders to collect
from borrowers. They stated that a change in the guidelines will result
in more expense for institutions, because of the need to revise their
existing collection policies and procedures. This can negatively affect
an institution's earnings and capital.
Others stated that a change in the charge-off time frames would
affect credit card securitization transactions. One commenter mentioned
that as of September 1997, $213 billion, or 40.6 percent of outstanding
credit card receivables, were securitized. Some commenters believed
that any change in the charge-off policy could trigger contractual
provisions, such as early amortization or collateral substitution
requirements. This would increase costs to credit card issuers and
limit their ability to sell securitizations, thus potentially
restricting credit card lending. Some commenters indicated that such a
change may cause them to exit the securitization market for years.
Some commenters expressed concern about the re-programming efforts
needed for a change in the charge-off policy. This comes at a time when
computer programmer resources are limited due to Year 2000 efforts.
Finally, some commenters contended that requiring earlier charge
offs will have an impact on consumers. The incentives for borrowers to
pay and for banks to invest in collection efforts are greatest before
the charge off has occurred. One industry association reported that 34
percent of accounts that are 120 days delinquent will be made current
before charge off under the 1980 policy. A shorter charge-off time
frame reduces the borrower's time to cure a debt. Once charge off
occurs, the customer's charged-off account is reported to the credit
bureau, further damaging the customer's credit rating and future
ability to obtain credit. Commenters stated that the customer loses the
incentive to pay, further impacting an institution's recoveries.
Given the division in comments as to the appropriate charge-off
policy guidelines, the FFIEC is requesting comment on two alternative
charge-off standards (only one of these will be implemented):
A uniform charge-off time frame for both open-end and
closed-end credit at 150 days delinquency with a proposed
implementation date of January 1, 2001; or
Retaining the existing policy of charging off delinquent
closed-end loans at 120 days and delinquent open-end loans at 180 days.
If this option is selected, any changes affected by the final policy
statement would have a January 1, 1999 implementation date.
Substandard classification policy: Thirty-six of 41 commenters
supported the practice of classifying open-end and closed-end loans
Substandard at 90 days delinquency. The majority of commenters opposed
a uniform policy of classifying loans Doubtful, placing them on
nonaccrual, or setting up separate reserves in lieu of charging off a
loan. The FFIEC has long felt that when an account is 90 days past due,
it displays weaknesses warranting classification and proposes to
continue the policy of classifying open-end and closed-end loans
Substandard at 90 days delinquency. The FFIEC has decided not to add
guidance for classifying retail credit Doubtful or placing those loans
on nonaccrual.
2. Bankruptcy, Fraud, and Deceased Accounts
The September Notice requested comment on whether there should be
separate guidance for determining: (i) when an account should be
charged off for bankruptcies under Chapter 7 or 13 of the Federal
Bankruptcy Code; (ii) the event in the bankruptcy process that should
trigger loss recognition; (iii) the amount of time needed by an
institution to charge off an account after the bankruptcy event; and
(iv) whether, as an alternative to an immediate charge off, it would be
beneficial to set up a specific reserve account. Comments also were
sought on the amount of time needed by an institution to charge off
losses due to fraud or losses on loans to deceased borrowers.
Bankruptcy: The majority of commenters, 26 of 40, stated that
separate guidance should not be developed for bankruptcies under
Chapter 7 or Chapter 13. Many
[[Page 36405]]
commenters stated that charge-off guidance recognizing bankruptcies
arising from defaults on secured loans versus bankruptcies arising from
defaults on unsecured is more realistic. The majority indicated that
the notification date to the creditor from the bankruptcy court should
constitute the event triggering loss recognition. The majority also did
not believe it should be necessary to set up a separate allowance
reserve at the time of the bankruptcy filing.
The FFIEC proposes to add guidance specifying that unsecured loans
for which the borrower declared bankruptcy should be charged off by the
end of the month that the creditor receives notification of filing from
the bankruptcy court. In addition, secured loans in bankruptcy should
be evaluated for repayment potential and classified appropriately,
within 30 days of notification of filing from the bankruptcy court, or
within the charge-off time frames in the classification policy,
whichever is shorter.
The FFIEC is aware that Congress is in the process of addressing
bankruptcy reform legislation. If legislation is passed, the FFIEC will
review its proposed bankruptcy guidelines for any changes that may be
necessary as a result of changes to the bankruptcy code.
Fraud: Commenters were divided equally with respect to the time
required to charge off fraudulent loans, either 30 days or 90 days. The
FFIEC recognized that a fraud investigation may last more than 30 days.
For that reason, the FFIEC is proposing that fraudulent retail credit
should be charged off within 90 days of discovery or within the charge-
off time frames adopted in this classification policy, whichever is
shorter.
Deceased Accounts: The majority of commenters reported that they
needed 150 days to work with the trustee of an estate to determine the
repayment potential of loans of deceased persons. The FFIEC recognizes
that working with the trustee or the deceased family may take months to
determine repayment potential. The FFIEC proposes that retail credit
loans of deceased persons should be evaluated and charged off when the
loss is determined, or within the charge-off time frames adopted in
this classification policy, whichever is shorter.
3. Partial Payments
The September notice requested comment on whether borrowers should
receive credit for partial payments in determining delinquency by
giving credit for any payment received and if this would require
significant computer programming changes. Comments were sought on other
reasonable alternatives and how payments should be applied. Comments
also were requested about the need for guidance on fixed payment
programs.
The commenters were divided evenly between supporting the proposal
versus keeping the existing policy whereby 90 percent of a payment
qualifies as a full payment. Many commented about the significant
programming costs that a change to the existing policy would cause. For
that reason, the FFIEC is proposing that institutions be permitted to
choose one of two methods. The first method retains the current policy
of considering a payment equivalent to 90 percent or more of the
contractual payment to be a full payment in computing delinquency. The
second method would allow an institution to aggregate payments and give
credit for any partial payment received; however, the account should be
considered delinquent until all contractual payments are received.
Whichever method is chosen, the same method should be used consistently
within the entire portfolio.
Most commenters did not advocate additional guidance for fixed
payment programs. Although no specific language is included in this
policy, when an institution grants interest rate or principal
concessions under a fixed payment program, and those concessions are
material, the institution should follow generally accepted accounting
principles (GAAP) guidelines presented in Financial Accounting
Standards Board (FASB) 15 (Accounting by Debtors and Creditors for
Troubled Debt Restructuring) and FASB 114 (Accounting by Creditors for
Impairment of a Loan).
4. Re-aging, Extension, Renewal, Deferral, or Rewrite Policy
The September notice proposed and requested comment on supervisory
standards for re-aging accounts.
Re-aging is the practice of bringing a delinquent account current
after the borrower has demonstrated a renewed willingness and ability
to repay the loan by making some, but not all, past due payments. A
liberal re-aging policy on credit card accounts, or an extension,
deferral, or rewrite policy on closed-end credit, can cloud the true
performance and delinquency status of the accounts. The majority of
commenters agreed that the borrower should show a renewed willingness
and ability to repay, re-aging should occur after receipt of three
months consecutive or equivalent lump sum payments, the account should
be opened for a minimum period of time before it can be re-aged, and
the account should not be re-aged more than once per year.
The FFIEC concurred with those criteria, but decided that
additional guidance on the amount that could be re-aged, and the number
of times the account could be re-aged in its lifetime were also needed.
The FFIEC proposes to allow re-aging of delinquent loans, when it is
based on recent, satisfactory performance by the borrowers and when it
is structured in accordance with the institution's prudent internal
policies. Institutions that re-age open-end accounts or extend, defer,
or rewrite closed-end accounts should establish a written policy,
ensure its reasonableness, and adhere to it. An account eligible for
re-aging, extension, deferral, or re-write exhibits the following:
The borrower should show a renewed willingness and ability
to repay the loan.
The borrower should make at least three consecutive
contractual payments or the equivalent lump sum payment (funds may not
be advanced by the institution for this purpose).
No more than one re-age, extension, deferral, or rewrite
should occur during any 12 month period.
The account should exist for at least 12 months before a
re-aging, extension, deferral, or rewrite is allowed.
No more than two re-agings, extensions, deferrals, or
rewrites should occur in the lifetime of the account.
The re-aged balance in the account should not exceed the
predelinquency credit limit.
A re-aged, extended, deferred, or rewritten loan should be
documented adequately.
5. Residential and Home Equity Loans
The September notice requested comment on whether residential and
home equity loans should be classified Substandard at a certain
delinquency and whether a collateral evaluation should be required at a
certain delinquency.
Twenty-eight of 37 commenters agreed with classifying residential
and home equity loans Substandard when they are 90 days delinquent. The
proposed policy statement classifies certain residential and home
equity loans Substandard at 90 days delinquent. However, the FFIEC
recognizes that delinquent, low loan-to-value loans (i.e., those loans
less than or equal to 60 percent of the real estate's value based on
the most current appraisal or evaluation) possess little likelihood for
loss as they are protected
[[Page 36406]]
adequately by the real estate. Those loans will be exempted from the
proposed classification policy. The FFIEC proposes that, if an
institution holds a first-lien residential real estate loan and a home
equity loan to the same borrower, and if the combined loan-to-value
ratio exceeds 60 percent, the loans should be classified as substandard
when both are delinquent more than 90 days. If only the residential
real estate loan is delinquent or if only the home equity loan is
delinquent, only the delinquent loan is classified substandard. If the
institution only holds the home equity loan and does not hold other
prior residential mortgages to the same borrower, and the loan is
delinquent 90 days or more, it should be classified Substandard.
The majority of commenters supported a collateral evaluation by the
time the loan is 180 days delinquent. The proposed policy statement
calls for a current evaluation of the collateral to be made by the time
a residential or home equity loan is: (1) 150 days past due, if option
one under the charge off time frames is selected, or (2) 120 days past
due for closed-end credit and 180 days past due for open-end credit, if
option 2 is selected. The outstanding balance in the loan in excess of
fair value of the collateral, less the cost to sell, should be
classified Loss and the balance classified Substandard.
6. Need for Additional Retail Credit Guidance
The September notice requested comment as to whether additional
supervisory guidance is needed or would be beneficial. Comments were
also sought as to whether additional supervisory guidance is needed on
the loan loss reserve for retail credit.
The majority of commenters did not support any other regulatory
guidance. Any additional guidance on the allowance for loan and lease
loss will be addressed in other policy statements.
Proposed Revision
The FFIEC drafted a revised policy statement in consideration of
the comments. The proposed policy statement will:
Establish a charge-off policy for open-end and closed-end
credit based on delinquency under one of two possible time frames;
Provide guidance for loans affected by bankruptcy,
fraudulent activity, and death;
Establish standards for re-aging, extending, deferring, or
rewriting of past due accounts;
Classify certain delinquent residential mortgage and home
equity loans; and
Broaden the recognition of partial payments that qualify
as a full payment.
The FFIEC considered the effect of GAAP on this guidance. GAAP
requires that a loss be recognized promptly for assets or portions of
assets deemed uncollectible. The FFIEC believes that this guidance
requires prompt recognition of losses, and therefore, is consistent
with GAAP.
This proposed policy statement, if adopted, will apply to all
regulated financial institutions and their operating subsidiaries
supervised by the FRB, FDIC, OCC, and OTS.
The proposed text of the statement is as follows:
Uniform Retail Credit Classification Policy 1
---------------------------------------------------------------------------
\1\ The regulatory classifications used for retail credit are
Substandard, Doubtful, and Loss. These are defined as follows:
Substandard: An asset classified Substandard is protected
inadequately by the current net worth and paying capacity of the
obligor, or by the collateral pledged, if any. Assets so classified
must have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the
deficiencies are not corrected. Doubtful: An asset classified
Doubtful has all the weaknesses inherent in one classified
Substandard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and
improbable. Loss: An asset, or portion thereof, classified Loss is
considered uncollectible, and of such little value that its
continuance on the books is not warranted. This classification does
not mean that the asset has absolutely no recovery or salvage value;
rather, it is not practical or desirable to defer writing off an
essentially worthless asset (or portion thereof), even though
partial recovery may occur in the future.
Although the Board of Governors of the Federal Reserve System,
Federal Deposit Insurance Corporation, Office of the Comptroller of
the Currency, and Office of Thrift Supervision do not require
institutions to adopt the identical classification definitions,
institutions should classify their assets using a system that can be
easily reconciled with the regulatory classification system.
---------------------------------------------------------------------------
Evidence of the quality of consumer credit soundness is indicated
best by the repayment performance demonstrated by the borrower. When
loans become seriously delinquent (90 days or more contractually past
due), they display weaknesses that, if left uncorrected, may result in
a loss. Because retail credit generally is comprised of a large number
of relatively small balance loans, evaluating the quality of the retail
credit portfolio on a loan-by-loan basis is inefficient and burdensome
to the institution being examined and to examiners. Therefore, in
general, retail credit should be classified based on the following
criteria:
[Option 1]: Open-end and closed-end retail loans that
become past due 150 cumulative days or more from the contractual due
date should be charged off. The charge off should be effected by the
end of the month in which the requirement is triggered. Open-end and
closed-end retail loans that are past due 90 days or more, but less
than 150 cumulative days, should be classified Substandard or
[Option 2]: Closed-end retail loans that become past due
120 cumulative days and open-end retail loans that become past due 180
cumulative days from the contractual due date should be charged off.
The charge off should be effected by the end of the month in which the
requirement is triggered. Open-end and closed-end retail loans that are
past due 90 days or more should be classified Substandard.2
---------------------------------------------------------------------------
\2\ The final policy will adopt only one of these options.
---------------------------------------------------------------------------
Unsecured loans for which the borrower declared bankruptcy
should 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 this classification policy,
whichever is shorter.
For secured and partially secured loans in bankruptcy, the
collateral and the institution's security position in the bankruptcy
court should be evaluated. Any outstanding investment in the loan in
excess of the fair value of the collateral, less the cost to sell,
should be charged off within 30 days of notification of filing from the
bankruptcy court, or within the time frames in this classification
policy, whichever is shorter. The remainder of the loan should be
classified Substandard until the borrower re-establishes the ability
and willingness to repay.
Fraudulent loans should be charged off within 90 days of
discovery, or within the time frames in this classification policy,
whichever is shorter.
Loans of deceased persons should be charged off when the
loss is determined, or within the time frames adopted in this
classification policy, 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%, should be classified Substandard.
A current evaluation of the loan's collateral should be
made by the time a residential or home equity loan is: (1) 150 days
past due if option one under the charge off time frames is selected or
[[Page 36407]]
(2) 120 days past due for closed-end credit and 180 days past due for
open-end credit if option 2 is selected. Any investment in excess of
fair value of the collateral, less cost to sell, should be classified
Loss and the balance classified Substandard.
Certain residential real estate loans with low loan-to-value ratios
are exempt from classification based on delinquency, although these
loans may be reviewed and classified individually. Residential real
estate loans with a loan-to-value ratio equal to, or less than, 60
percent should not be classified based solely on delinquency status. In
addition, home equity loans to the same borrower at the same
institution as the senior mortgage loan with a combined loan-to-value
ratio equal to, or less than, 60 percent, should not be classified.
However, home equity loans where the institution does not hold the
senior mortgage that are delinquent 90 days or more should be
classified Substandard, even if the loan-to-value ratio is reportedly
equal to, or less than, 60 percent.
The use of delinquency to classify retail credit is based on the
presumption that delinquent loans display a serious weakness or
weaknesses that, if uncorrected, demonstrate the distinct possibility
that the institution will suffer a loss of either principal or
interest. However, if an institution can clearly document that the
delinquent loan is well secured and in the process of collection, such
that collection will occur regardless of delinquency status, then the
loan need not be classified. A well secured loan is collateralized by a
perfected security interest on, or pledges of, real or personal
property, including securities, with an estimated fair value, less cost
to sell, sufficient to recover the recorded investment in the loan, as
well as a reasonable return on that amount. In the process of
collection means that either collection efforts or legal action is
proceeding, and is reasonably expected to result in recovery of the
recorded investment in the loan or its restoration to a current status,
generally within the next 90 days.
This policy does not preclude an institution from adopting an
internal classification policy more conservative than the one detailed
above. It also does not preclude a regulatory agency from using the
Doubtful classification in certain situations if a rating more severe
than Substandard is justified. Nor does it preclude a charge-off sooner
when accounts are recognized as Loss.
Partial Payments on Open-End and Closed-End Credit
Institutions should use one of two methods to recognize partial
payments. A payment equivalent to 90 percent or more of the contractual
payment may be considered a full payment in computing delinquency.
Alternatively, the institution may aggregate payments and give credit
for any partial payment received. However, the account should be
considered delinquent until all contractual payments are received. For
example, if a regular installment payment is $300 and the borrower
makes payments of only $150 per month for a six-month period, the loan
would be $900 ($150 shortage times six payments), or three full months
delinquent. Whichever method is chosen, the same method should be used
consistently within the entire portfolio.
Re-agings, Extensions, Deferrals, or Rewrites
Re-aging is the practice of bringing a delinquent account current
after the borrower has demonstrated a renewed willingness and ability
to repay the loan by making some, but not all, past due payments. A
permissive re-aging policy on credit card accounts, or an extension,
deferral, or re-write policy on closed-end credit, can cloud the true
performance and delinquency status of the accounts. However, prudent
use of the re-aging policy is acceptable when it is based on recent,
satisfactory performance and the borrower's other positive credit
factors and when it is structured in accordance with the institution's
internal policies. Institutions that re-age open-end accounts, or
extend, defer, or re-write closed-end accounts, should establish a
written policy, ensure its reasonableness, and adhere to it. An account
eligible for re-aging, extension, deferral, or rewrite exhibits the
following:
The borrower should show a renewed willingness and ability
to repay the loan.
The borrower should make at least three consecutive
contractual payments or the equivalent lump sum payment (funds may not
be advanced by the institution for this purpose).
No loan should be re-aged, extended, deferred, or
rewritten more than once within the preceding 12 months.
The account should exist for at least 12 months before a
re-aging, extension, deferral, or re-write is allowed.
No more than two re-agings, extensions, deferrals, or re-
writes should occur in the lifetime of the account.
The re-aged balance in the account should not exceed the
predelinquency credit limit.
An institution should ensure that a re-aged, extended,
deferred, or re-written loan meets the agencies' and institution's
standards. The institution should adequately identify, discuss, and
document any account that is re-aged, extended, deferred, or re-
written.
Examination Considerations
Examiners should ensure that institutions adhere to this policy.
Nevertheless, there may be instances that warrant exceptions to the
general classification policy. Loans need not be classified if the
institution can document clearly that repayment will occur irrespective
of delinquency status. Examples might include loans well secured by
marketable collateral and in the process of collection, loans for which
claims are filed against solvent estates, and loans supported by
insurance.
The uniform classification policy does not preclude examiners from
reviewing and classifying individual large dollar retail credit loans,
which may or may not be delinquent, but exhibit signs of credit
weakness.
In addition to loan classification, the examination should focus on
the institution's allowance for loan and lease loss and its risk and
account management systems, including retail credit lending policy,
adherence to stated policy, and operating procedures. Internal controls
should be in place to assure that the policy is followed. Institutions
lacking sound policies or failing to implement or effectively follow
established policies will be subject to criticism.
Request for Comment
The FFIEC is requesting comments on all aspects of the proposed
policy statement. In addition, the FFIEC also is asking for comment on
a number of issues affecting the charge-off policy and will consider
the answers before developing the final policy statement:
1. What would be the costs and benefits of the uniform 150 day
charge-off time frame? What would be the costs and benefits of leaving
the policy at the current 120/180 day charge-off time frames? The FFIEC
welcomes historical statistical evidence showing the dollars and
percentages of open-end accounts collected between 120 days delinquency
and 150 days delinquency and between 150 days delinquency and 180 days
delinquency.
[[Page 36408]]
2. What will be the effect of the proposed two time frame charge-
off options on institutions? If possible, please quantify, in dollar
amounts and percentages (of total operating expenses), the impact of
the proposed options in the charge-off policy in the first year of
implementation and in subsequent years for open-end and closed-end
credits on:
(a) gross and net charge-offs;
(b) recoveries;
(c) earnings; and
(d) securitization transactions.
3. What are the expected dollar costs of reprogramming to implement
the first option (uniform charge-off policy at 150 days past due) and
what percentage of total operating expenses do those programming
dollars represent? Also, can the programming changes be completed by
the proposed January 1, 2001 implementation date?
4. Please provide any other information that the FFIEC should
consider in determining the final policy statement including the
optimal implementation date for the proposed changes.
Dated: June 30, 1998.
Keith J. Todd,
Acting Executive Secretary, Federal Financial Institutions Examination
Council.
[FR Doc. 98-17782 Filed 7-2-98; 8:45 am]
BILLING CODE 6210-01-P, 25% 6714-01-P, 25% 6720-01-P, 25% 4810-33-P 25%