The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
federal Re se r v e Ba n k DALLAS, TEXAS of Dallas 75222 C ircular No. 80-41 March 11, 1980 EXAMINATION POLICY FOR CLASSIFICATION OF CONSUMER INSTALLMENT CREDIT TO ALL STATE MEMBER BANKS IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Federal Reserve Board has adopted an examination policy for the classification of deliquent consumer installment loans held by sta te member banks. The Board acted on a recommendation made February 14, 1980, by the Federal Financial Institutions Examination Council to the three Federal bank regulators for a uniform examination policy. The Federal Deposit Insurance Corporation and the Comptroller of the Currency are expected to act on the recommendation shortly. The new policy, which becomes effective June 30, 1980, is enclosed. Any questions concerning the policy should be directed to Uzziah Anderson or Marvin McCoy of our Bank Supervision and Regulations Department, Ext. 6274. Sincerely yours, Robert H. Boykin First Vice President Enclosure Banks and others are encouraged to use the following incoming W A T S num bers in c o n tacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) UNIFORM POLICY FOR CLASSIFICATION OF CONSUMER INSTALMENT CREDIT BASED ON DELINQUENCY STATUS The Policy frlTRODUCTlON This examination policy establishes uniform guidelines for the classification of instalm ent credit based on delinquency status. This use of a formula approach in determining consumer loan classifications parallels, in principle, current industry practices and recognizes the predicated on past due status. statistical validity of measuring losses The policy covers both open- and closed-end credit. Although the th ree Federal banking agencies have historically relied on delinquency sta tu s as a major determ inant in classifying consumer interagency standard has been employed. instalm ent credit, no The policy seeks to provide th a t standard and should result in more uniform tre a tm e n t of all classes of insured banks and in more consistent statistical data being developed from bank examination reports. The general classification policy recognizes th a t evaluating the quality of a consumer credit portfolio on a loan-by-loan basis is inefficient and unnecessary. For this reason, examiners are expected to adhere closely to the policy in their analysis of consumer credit. Nevertheless, it is recognized th at there are instances, particularly where significant amounts are involved, th at may warrant exceptions to the formula in order to recognize individual situations where the bank being examined can clearly dem onstrate th at repayment will occur irrespective of delinquency status. Examples of such situations might include: loans well secured by collateral and in the process of collection; loans where the claims have been filed against solvent e sta te s and loans supported by valid guarantees or insurance. - 2- General Classification Policy Examiners will adhere to the following general classification policy during examinations of com m ercial banks. (1) Closed-end consumer instalm ent credit delinquent 120 days or more (5 monthly payments) will be classified loss. Loans delinquent 90 to 119 days (4 monthly payments) will be classified substandard. (2) Open-end consumer instalm ent credit delinquent 180 days or more (7 zero billing cycles) will be classified loss. Loans delinquent 90 to 179 days (4 to 6 zero billing cycles) will be classified substandard. Definitions The following definitions are intended to provide guidance in application of the general classification policy. Consumer Instalment Loans - Includes open- and closed-end credit extended to individuals for household, family and other personal expenditures as defined in the instructions for preparation of call reports. Refer to such instructions for information on any loan where there is doubt as to whether it is covered by the general classification policy. Delinquency - Closed-end instalm ent credit is considered delinquent when the borrower is in arrears two monthly payments. Loans in arrears two monthly payments are considered 30 days delinquent. Banks generally tr e a t open-end credit differently than closed-end credit in computing delinquency. A bank credit card customer generally has 25 days in which to pay billings before the loan is considered delinquent. If no payment is made between two billing cycles, the balance is considered 5 days delinquent. If no payment is received before issuance of still another statem en t, the balance is 35 days delinquent technically; however, current p ractice is to define accounts with two zero billings as 30 days delinquent. See attach ed charts which illustrate delinquency computation. Statutory Bad Debts - Section 5204, USRS (12 U.S.C. 56), contains the definition for Federal Reserve System member banks of what constitutes bad debts. Accordingly, loans delinquent seven monthly payments, or seven billing cycles, are considered 180 days, or six months, past due and will be considered statutory bad debts, unless they are well secured and in the process of collection. Partial Payments - A paym ent equivalent to 90 per cent or more of the contractual payment may be considered a full payment in computing delinquency. Consumer Instalment Loan Examination Scope The general classification policy provides th a t perform ance is the principal criterion in application of the uniform policy during examinations of banks. In addition to loan classification, examination emphasis should focus on the bank's written consumer lending policy, adherence to stated policy and a review of operating procedures. It is expected th at a bank will have w ritten policies suitable for its specific objectives and th at they are consistent with prudent banking practices. Procedures for sipervising delinquent accounts, including the procedure for renewing and extending past due loans, and autom atic charge-off policy should be fully described. Internal controls should be in place to assure th at the bank's w ritten policy is being followed. Banks lacking w ritten policies or failing to implement or follow established policies effectively should be criticized by examiners in reports of examination. Effective Date This policy will be effectiv e June 30, 1980. CLOSED END CREDIT Due Date 3/10 4/10 5/10 6/10 7/10 * 8/10 9/10 Period Delinquency Status 3/11-04/09 4/10-05/09 5/10-06/09 6/10-07/09 7/10-0S/09 8/10-09/09 9/10 Classification Not delinquent 30 days or 2 payments 60 days or 3 payments 90 days or 4 payments 120 days or 5 payments 150 days or 6 payments 180 days or 7 payments Substandard Loss Loss Loss OPEN END CREDIT Zero Billing Cycle State ment Payment Record Days Delinquent S tatem ent 1 Due 25th 1 25 S tatem ent 2 30 1 No payment 5 S tatem ent 3 60 2 No payment 30 Statem ent 4 90 3 No payment 60 S tatem ent 5 120 4 No payment 90 Substandard S tatem ent 6 150 5 No payment 120 Substandard Statem ent 7 180 6 No payment 150 Substandard Statem ent 8** 210 7 No payment 180 * Charge-off occurs a fte r borrower is five payments delinquent. ** Charge-off occurs on seventh zero billing. Loss
@FedFRASER