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Federal Reserve Bank of DALLAS R O B ERT D. M cTEER , JR. DALLAS, TEXAS 75265-590 6 P R E S ID E N T AND C H IE F E X E C U T IV E O F F IC E R October 10, 1997 Notice 97-91 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Proposed Changes to the Uniform Retail Credit Classification Policy DETAILS The Board of Governors of the Federal Reserve System, the Federal Deposit Insur ance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Institu tions, under the auspices of the Federal Financial Institutions Examination Council (FFIEC), are requesting public comment on a wide range of retail credit classification policy issues. Agencies use the policy, titled 1980 Uniform Policy fo r Classification o f Consumer Instalment Credit Based on Delinquency Status, to uniformly classify retail credit loans of financial institutions. The FFIEC is currently reviewing the policy to determine where revisions may be necessary to more accurately reflect the changing nature of risk in today’s retail credit environ ment. Before developing a revised policy statement for public comment, the FFIEC is first soliciting comments on the following: • Areas in the existing policy statement that may need revision, • Specific recommendations for changing the policy statement, • Data that would help quantify the financial or business impact on financial institu tions if the existing policy was revised, and • An estimate of the time frames necessary for an institution to successfully imple ment the revisions. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) After reviewing the input received, the FFIEC will issue a revised policy statement for public comment that establishes clear guidance for the industry, is based on an informed and reasonable analysis of all available data, and satisfies the principles of sound and effective supervision. The FFIEC must receive comments by November 12, 1997. Please address com ments to Joe M. Cleaver, Executive Secretary, Federal Financial Institutions Examination Coun cil, 2100 Pennsylvania Avenue NW, Suite 200, Washington, DC 20037. ATTACHMENT A copy of the interagency notice as it appears on pages 48089-92, Vol. 62, No. 177 of the Federal Register dated September 12, 1997, is attached. MORE INFORMATION For more information, please contact Marion White at (214) 922-6155. For addi tional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254. Sincerely yours, Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Notices 48089 FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL Uniform Retail Credit Classification Policy Federal Financial Institutions Examination Council. ACTION: Notice and request for comment. AGENCY: 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), u nder the auspices of the Federal Financial Institutions Examination Council (FFIEC), are requesting comment on changes to the 1980 Uniform Policy for Classification of Consumer Instalment Credit Based on Delinquency Status (1980 policy). The 1980 policy is used by the agencies for classifying retail credit loans of financial institutions on a uniform basis. The FFIEC is currently reviewing the 1980 policy to determine where revisions may be necessary to more accurately reflect the changing nature of risk in today’s retail credit environment. The prelim inary results of this review indicate that revisions should include: a charge-off policy for open-end and closed-end credit; a classification policy for loans affected by bankruptcy, fraudulent activity, and/or death of a borrower; a prudent re-aging policy for past due accounts; and a classification policy for delinquent residential mortgage and home equity loans. Before developing a revised policy statement for public comment, the FFIEC is first soliciting comments on: areas in the existing policy statement that may need to be revised; specific recom m endations for changing the policy statement; data that w ould help quantify the financial or business im pact on financial institutions if the existing policy was revised; and an estimate of the tim e frames necessary for SUMMARY: 48090 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Notices an institution to successfully im plem ent the revisions. After reviewing the input received, the FFIEC w ill issue a revised policy statem ent for public comment that establishes clear guidance for the industry; is based on an informed and reasonable analysis of all available data; and satisfies the principles of sound and effective supervision. DATES; Comments m ust be received by November 12, 1997. ADDRESSES: Comments should be sent to Joe M. Cleaver, Executive Secretary, Federal Financial Institutions Examination Council, 2100 Pennsylvania Avenue NW, Suite 200, W ashington, DC 20037 or by facsimile transm ission to (202) 634-6556. FOR FURTHER INFORMATION CONTACT: FRB: W illiam Coen, Supervisory Financial Analyst, (202) 452-5219, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System. For the hearing im paired only, Telecom m unication Device for the Deaf (TDD), Dorothea Thompson, (202) 452-3544, Board of Governors of the Federal Reserve System, 20th and C Streets NW, W ashington, 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, W ashington, DC 20429. OCC: Cathy Young, National Bank Examiner, Credit Risk Division, (202) 874-4474; Ron Shimabukuro, Senior Attorney, Legislative and Regulatory Activities Division, Office of the Comptroller of the Currency (202) 8745090, 250 E Street SW, W ashington, DC 20219. OTS: W illiam J. Magrini, Senior Project Manager, (202) 906-5744, Supervision Policy; Vern McKinley, Attorney, (202) 906-6241, Regulations and Legislation Division, Chief Counsel’s Office, Office of Thrift Supervision, 1700 G Street NW, W ashington, 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. The OTS adopted the policy in 1987. The policy was issued to establish uniform guidelines for the classification of instalm ent credit based on delinquency status. W hile the 1980 policy recognized the statistical validity of m easuring losses predicated on past due status, the 1980 policy also perm itted exceptions to the classification policy in situations where significant am ounts were involved or w hen a loan was well secured and in the process of collection. A fundam ental objective of the 1980 policy is the tim ely recognition of losses as required by generally accepted accounting principles (GAAP). While the 1980 policy provides general guidance for a large segment of the retail credit portfolio, it does not provide supervisory guidance on loan chargeoffs related to consum er bankruptcy, fraudulent activities, and accounts of decedents. Furthermore, no guidance is provided on the classification of delinquent residential mortgages and home equity loans. In light of the questionable asset quality of m any of these accounts and the inconsistent way in w hich financial institutions report and charge-off these accounts, the FFIEC believes that additional supervisory guidance is necessary. Request for Comments in the Following Areas (1) Charge-off Policy fo r Open-End and Closed-End Credit The agencies recognize the inconsistency betw een the level of risk associated w ith open-end and closedend credit and the policy for chargingoff delinquent accounts. U nder the 1980 policy, open-end credit, w hich is generally unsecured, should be chargedoff w hen an account is 180 days delinquent. Conversely, closed-end credit, w hich is normally secured by some type of collateral, is subject to a more stringent policy of 120 days delinquent before a loan is charged off. Over the years this inconsistency has become more apparent as the m arket for open-end credit evolved. In 1980, open-end credit generally consisted of credit card accounts w ith small credit lines that lim ited the exposure an institution had to an individual borrower. In today’s environment, open-end credit generally includes accounts w ith m uch larger lines of credit and higher risk levels. The change in the nature of these accounts, com bined w ith the variety of charge-off practices examiners recently encountered, raised the concern of the agencies. To address this concern, the FFIEC is seeking public com m ent on w hether a charge-off policy that is more consistent w ith the risk associated w ith open-end and closed-end accounts should be adopted and if so, w hat that policy should be. Specifically, the FFIEC requests comment on: (l)(a) Should a uniform time frame be used to charge-off both open-end and closed-end accounts? (l)(b) If so, w hat should that time frame be? (l)(c) If a uniform time frame for both types of credit is not considered appropriate, w hat time frames are reasonable for charging off open-end credit and closed-end credit? Please explain. (l)(d) If there was a change in the time frames for charging-off delinquent accounts, w hat is a reasonable time frame to allow institutions to comply w ith such a change? (l)(e) Should the current regulatory practice be continued of classifying open-end and closed-end credit Substandard w hen the account is 90 days or more delinquent? If not, w hat alternative w ould you suggest? Please explain the benefits of a suggested alternative. (l)(f) Should a standard for the Doubtful classification be adopted and, if so, w hat should be the standard and why? (i)(g) Currently, no requirem ent exists to place retail credit loans on nonaccrual status. Should guidance for placing loans on a nonaccrual status be adopted and, if so, at how m any days delinquent should open-end credit and closed-end credit be placed on a nonaccrual status? (1)(h) An alternative to a requirem ent that accounts be charged-off after a designated delinquency is the creation of an allocated or specific reserve. Should the FFIEC require an allocated or specific reserve, and if so, w hen should it be established? Please discuss the advantages and disadvantages of such a proposal. (2] Bankruptcy, Fraud, and Deceased A ccounts No FFIEC guidance exists for bankruptcy, fraud, and deceased accounts. The FFIEC believes guidance on these accounts is needed to ensure recognition of loss among regulated institutions is timely and consistent. Comment is requested on the need to provide such guidance and on the following more specific issues. (2)(a) Should there be separate guidance for determining w hen an account should be charged-off for Chapter 7 bankruptcies and Chapter 13 bankruptcies? If so, w hat should that guidance be? (2)(b) What event in the bankruptcy process should trigger loss recognition: the filing date, the date of notification to the creditor by the bankruptcy court that a borrow er has filed for bankruptcy, the date that the bankruptcy trustee Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Notices meets w ith the creditors, or some other date? Please explain w hy one date is better than another. (2)(c) How m uch time is needed by an institution to process the charge-off after any one of the bankruptcy events identified in question 2(a)? (2)(d) As an alternative to an im m ediate charge off, w ould it be beneficial to set up a specific reserve account at the tim e of the filing and charge the loss to that reserve account at the bankruptcy discharge date? Please explain the pros and cons of this alternative. (2)(e) Subsequent to notification, how m uch time is needed by an institution to charge-off losses due to loan fraud? (2)(f) Subsequent to notification, how m uch time is needed by an institution to charge-off losses on ioans to deceased borrowers? (3) Partial Paym ents The 1980 policy includes a provision that 90 percent of a contractual payment w ill be considered a full payment. However, if less than 90 percent is received, no recognition of any paym ent is given. The FFIEC is considering elim inating this policy provision and giving credit for any partial payments received. If such a change is adopted, a loan w ill be considered one m onth delinquent w hen the sum of the m issed portions of the paym ents equals one full payment. A series of partial payments could result in accum ulating delinquencies. For example, if a regular installm ent paym ent is $300 and the borrower makes paym ents of only $150 per m onth for a six-month period, the loan w ould be $900, or three full m onths delinquent. (3)(a) Should borrowers receive credit for partial paym ents in determining delinquency using the m ethod described? If so, w ould such a change require significant com puter programming changes? Are there other reasonable alternatives? (3)(b) If partial paym ents are allowed, how should the paym ent be applied? (3)(b)(l) Pro rata, equally to principle and interest. (3)(b)(2) First to principle, any remaining to interest. (3)(b)(3) Other. No guidance currently exists on fixed paym ent programs. Fixed payment accounts are accounts for w hich a paym ent plan (less than contractual) has been established as a result of credit counseling, bankruptcy proceedings, or direct negotiations. (3)(c) Should the FFIEC adopt policy guidance on fixed paym ent programs? W hat should that guidance be? (4) Re-Aging, Extension, Renewal, or Deferral Policy Re-aging is the practice of bringing a delinquent account current after the borrower has dem onstrated a renew ed w illingness and ability to repay the loan by making some, but not all, past due payments. A perm issive re-aging policy on credit card accounts or an extension, renewal, or deferral policy on other types of retail credit can distort the true performance and delinquency status of individual accounts and the entire portfolio. Re-aging, extension, renewal, or deferral of delinquent loans is an acceptable practice w hen it is based on recent, satisfactory performance and other positive credit factors of the borrower and w hen it is structured in accordance w ith pru dent internal policies. Institutions that re-age, extend, renew, or defer accounts should establish a reasonable policy and ensure that it is followed by adopting appropriate operating standards. While no FFIEC guidance currently addresses this issue, it is an area where uniform guidance is appropriate to protect against distortions in the performance of the consum er loan portfolio. The following standards are under consideration: (4)(a) The borrower shows a renew ed willingness and ability to repay the loan. Is this standard appropriate? (4)(b) The borrower makes a certain num ber of contractual paym ents or the equivalent amount. How many paym ents are appropriate? (4)(c) The loan can only be re-aged, extended, renewed, or deferred once w ithin a specified time. W hat time frame is appropriate? Should there be a lim it to the num ber of re-agings over the life of an account? If so, w hat should that limit be? (4)(d) The account m ust be in existence for a certain period of time before it can be re-aged, extended, renewed, or deferred. What tim e period is appropriate? (4)(e) The loan balance should not exceed the predelinquency credit limits (last lim it approved by bank). Is this standard appropriate? (4)(f) Other. What other standards should be considered? (5) R esidential and H om e E quity Loans No FFIEC uniform classification policy exists for residential and home equity loans. Since most of these loans are underw ritten using uniform credit criteria, the FFIEC supports reviewing and classifying these portfolios on an aggregate basis. The FFIEC is considering the substandard classification based on delinquency status. 48091 As the delinquency progresses, repaym ent becomes dependent on the sale of the real estate collateral. For collateral dependent loans, GAAP requires that any loan am ount in excess of the collateral’s fair value less cost to sell should be charged off, or that a valuation allowance be established for that excess amount. The FFIEC is considering requiring that an evaluation of the residential collateral be made w ithin a prescribed delinquency time frame to determ ine fair value. (5)(a) Should residential and home equity loans be classified substandard at a certain delinquency (similar to the time period used in open-end and closed-end credit)? If so, w hat should that delinquency be? (5)(b) Should the FFIEC require a collateral evaluation at a certain delinquency? If so, w hat should that delinquency tim e frame be? (6) N eed fo r A dditional Retail Credit Guidance The FFIEC notes that classification policies are just one com ponent of prudent loan portfolio management. Classification policies, by themselves, do not address potential problems or weaknesses that may exist in the origination and underw riting of such loans. (6)(a) W hat type of additional supervisory guidance is needed or w ould be beneficial to address this or other aspects of retail credit portfolio management? (6)(d) Should there be additional supervisory guidance on the loan loss reserve for retail credit? (7) Industry Experience and Im pact The FFIEC welcomes comment on any other issues that it should consider in updating this policy. Additionally, the FFIEC w ould benefit from receiving financial institutions’ data on their charge off and recovery experience rates for charged-off open-end credit, closedend credit, loans in bankruptcy, fraudulent loans, or loans of deceased persons. The FFIEC is also interested in understanding the financial and business practice im pact that these policy changes m ay have. Revisions to the 1980 policy may result in changes to the Call Report, w hich may require banks to make reporting system changes. If an institution’s recom m endations vary from current business practice, please provide an estimate of the programming costs or other costs that will be incurred to change the practice and report accurately. Some institutions have securitized and sold their loans, but such loans are still under institution 48092 Federal Register / Vol. 62, No. 177 / Friday, September 12, 1997 / Notices management. Please comment on how the FFIEC should treat such loans. D a te d : S e p t e m b e r 9, 1997. Joe M .C leaver, Executive Secretary, Federal Financial Institutions Examination Council. [FR D o c. 9 7 - 2 4 2 3 5 F i l e d 9 - 1 1 - 9 7 ; 8:45 am ] BILLING CODE 4810 -33 -P , 6210 -01 -P , 6714-01-P , 6720-01- P
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