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For release on delivery
10:00 am, EDT
September 24, 1993

Statement by
John P. LaWare
Member, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Finance and Urban Affairs

U.S. House of Representatives
September 24, 1993

I appreciate the opportunity to speak to you today
about the challenges that face banks in meeting the service and
credit needs of low-income and minority communities.

I commend

the Carmittee for holding this hearing in a local comnunity in
Prince Georges County where questions pertaining to these factors
have been raised.
It is our understanding that the Comnittee is
interested in developing a profile of current lending activity in
a specific neighborhood in Prince George's County, and then
periodically reviewing the record for changes in bank credit and
service delivery.

As a starting point for analysis, we were

furnished a list of 39 census tracts and a list of banks and
thrifts which were identified by the Corrmittee as having a branch
or office located in these specific census tracts, or as I will
refer to it in the testimony, the "target area".
I toured the target area with the Director of Housing
and Community Development for Prince Georges County.

During that

visit we discussed demographics, housing, and other conditions in
the county, as a whole, and in the target area specifically.


saw many encouraging developments in some areas - and
opportunities in others - which I will address later in this
First I would like to comment on some of the specific
characteristics of the neighborhood.

I will make some general

observations about the overall HMDA. data for the area.

Then I

will briefly discuss the banks for which the Federal Reserve is

- 2 the primary regulator which are located in the target area.
Finally, I would like to acquaint the committee with some of the
initiatives being undertaken by the financial institution
regulators and the Federal Reserve specifically, to address
credit availability for underserved areas.
Characteristics of Prince Georges County
Prince Georges County is an interesting area for this
type of study since it has undergone some massive changes in
population and demographics during the past ten years.


County estimates the 1992 population at roughly 750,000 people.
This is an increase of 20,000 people just since the 1990 census,
and an increase of 85,000 in population since the 1980 census.
The county's population is 58% minority, including 50%
black and 8% Hispanic, Asian and other minorities.


represents a shift since 1980 when the county was majority white.
The shift is a result of the out-migration of whites coupled with
the in-migration of blacks, many of whom came from Washington,
D.C. in search of better housing values and public school

Many of the blacks who have moved into the county

represent middle- and upper-income families.

Prince Georges

County has both the highest median income for a black population
and the largest number of black-owned businesses of any county in
the United States.
The 39 census tracts which make up the target area of
interest to the Corrmittee differ from the county overall in some
demographic characteristics.

The population of the target area

- 3 is 159,000 and consists of 82% blacks and 3% Hispanic, Asian and
other minorities.

Even though this area has a greater percentage

black population than the county as a whole, the median income
for the target area of $46,476 is very close to the county median
of $49,031.

However, the median home value for the target area

of $111,779 is lower than the county median of $123,995.


percentage of owner-occupied units in the 39 tracts (56.9%) is
roughly equivalent to the county (56.2%) .
During my tour of the target area, I observed that, as
was expected, most of the older, lower-income housing is closest
to the District line.

Some of the residences in these areas are

currently undergoing rehabilitation, and some of those rehabs are
being financed by the County government.
financed privately.

Others are being

There are many other homes in the general

area that apparently could benefit from repair or improvement.
The caimercial areas in those neighborhoods are small retail

We did see a number of bank branches in certain

commercial areas near the District line; however, there were also
quite a few check cashing operations and liquor stores which also
frequently cash checks.
As you travel further out Central Avenue toward
Enterprise Road there is a lot of new housing and commercial

The housing stock reflects an upward shift in

income, with recently built larger, more expensive homes.

I was

struck by the apparent diversity of income within the relatively
small area of the 39 targeted census tracts.

- 4 As indicated by the attached maps, we have plotted the
locations of all the depository institutions with offices in the
target area.

Six of these institutions have branches or offices

along the narrow Central Avenue corridor.

The largest number of

(12), are clustered in the southwest area of the

designated community.

That southwest c o m e r of the target area

includes census tracts with a population which is 60-80%
minority, and with median family incomes that fall in the range
of 80-120% of the MSA median income ($54,173 in 1990) .


remainder of the branches are scattered throughout the

The areas with the lowest income do not have many

branches of banks or savings and loans.

Hero Mortgage Lending
The best information available about the types and
volume of credit extended in the neighborhoods which are the
focus of these hearings is for residential lending.

As a product

of the data collected under the authority of the Home Mortgage
Disclosure Act

(HMDA), we know both the types and volume of home

loans applied for and granted in selected census tracts.

We also

know the race and income of the applicants and borrowers.
For this hearing, on behalf of all the agencies here
today, we examined the 1992 HMDA data which is still being
processed by the Federal Reserve Board.

The HMDA reports are

quite revealing, although I must caution that revisions to the
data are still possible since we are just completing the final
editing of the 1992 data.

We will be happy to provide the

- 5 -

Cannittee with revised information if corrections are made.
The Federal Reserve used the preliminary 1992 HMDA. data
to prepare special reports showing the home lending activity of
the depository institutions having branches in the target
neighborhoods, in addition to a report that shows the lending
activity of all lenders covered by HMDA for these neighborhoods
including those, such as mortgage companies, which have no
deposit-taking function.
The 1992 HMDA data show that the depository
institutions with branches in the target neighborhoods received
relatively few applications for credit to purchase or irrprove
homes or refinance existing mortgages in these neighborhoods.
When comparing the HMDA data and the maps showing the location of
institution branches, it is somewhat surprising that, at least in
the target area, branch location seems to have no relation to the
number of housing-related loan applications.
According to the 1992 HMDA data, the depository
institutions which have branches in the target area received 15
applications for home purchase loans, 9 of which were approved;
98 applications for refinancing, 56 of which were approved; and
150 applications for home improvement loans, 59 of which were

However the HMDA data also reveal that approximately

190 lenders covered by HMDA with locations outside the target
area - both depositories and mortgage companies - received loan
applications pertaining to properties in the target area.


lenders with office locations outside the target area include 80

- 6 banks and thrifts, 63 mortgage company subsidiaries of banks and
thrifts, and 50 independent mortgage companies.

I should note

that the HMDA data probably understate the total number of
residential lenders active in these areas since some of the
lenders extending credit in these neighborhoods either are exempt
from HMDA because of the institution's size (under $10 million in
assets) or location (not in an MSA), or, because of a low volume
of loans are not required to report their lending in the
Washington MSA by census tract.
In 1992, the roughly 190 other lenders active in the
target neighborhoods received approximately 2900 applications for
home purchase loans, of which 1900 were approved; 2850
applications for refinancing, of which approximately 2150 were
approved; and roughly 700 applications for home inprovement
loans, of which 400 were approved.
One thing that is shown by the HMDA data is the
disposition of housing-related applications.

On a national

basis, the denial rate for Black applicants for conventional home
purchase loans is about twice the rate for white applicants.
However, in the target area, the black denial rate of 18.8% is
actually lower than the white denial rate of 20.8%.
We also looked at the denial rates for other types of
housing products extended by all lenders in the target area.
Historically, the denial rates nationally for FHA/VA home
purchase loans have been 26.4% for black and 16.3% for white

In the target area, for 1992, these rates also

- 7 reflect roughly an 8 percentage point difference and are 18.3%
for black and 10.2% for white applicants.

Refinancing and home

improvement applications in the target area show very different
denial rates than the national norms.

Mortgage refinancing

applications nationally have resulted in denial rates of 29.5%
for black and 13.7% for white applicants.

The target area, in

1992, experienced a 12.2% denial rate for black and a 10.5%
denial rate for white applicants, a significantly lower disparity
than the national figures.

Home improvement applications

demonstrated a similar pattern.

Whereas nationally the denial

rates were 44.2% for black applicants and 21.1% for white
applicants, in the target area the denial rates were 39.5% for
black and 38.7% for white applicants.
It is worth noting that while the local depository
institutions accounted for a very small proportion of all the
home purchase and home refinancing applications in the target
neighborhoods, they were major players in home improvement loans,
accounting for about 20% of total applications.
By examining the 1992 HMDA data we can learn something
about the types of loans used by homebuyers in the targeted area
for this review.

In 1992, of the roughly 2900 applications for

home purchase loans, 61% were either for FHA-insured or VAguaranteed loans, the remainder were for conventional loans.
Among low- and moderate-income black applicants for home purchase
loans, 75% applied for government-backed loans, while only 49% of
white applicants with similar incomes sought government-backed

- 8 credit.

The reasons for these differences are not known.

State Member Banks in the Target Area
The Federal Reserve has primary regulatory
responsibility for only two of the banks which appeared on the
list supplied by the Conrmittee.
total of

These two banks together have a

four branches or offices in the designated area.


of the banks became a member of the Federal Reserve just within
the past year.

That bank was last examined, for compliance with

the Community Reinvestment Act, by its previous regulator, in
1989, before public disclosure of CRA ratings.
do not have a public rating at this time.

Consequently, we

That bank is scheduled

for a compliance examination, which will include a review of
performance under the Comnunity Reinvestment Act, by the Federal
Reserve Bank of Richmond in November.

Upon completion of that

examination, we will be glad to send the Conmittee a copy of the
publicly disclosed CRA Evaluation Report.
The other state-member institution in the neighborhood
was rated "satisfactory" in April, 1993.

The Conrmittee has

already been sent a copy of that report.

It is important to keep

in mind that the evaluation of that bank is based on its entire
delineated comnunity which encompasses a large area including,
but not limited to, parts of Prince Georges County.
Both state member banks offer a broad range of credit
services including loans for home irrprovement, refinancing, and
purchase (including FHA/VA loans); residential and commercial
construction; small business start-up, expansion, and operation;

- 9 and general consumer loans.
One of the state member banks will cash government
checks for non-customers with proper identification.
bank provides that service for customers only.

The other

Both banks have

low-cost basic checking accounts with no minimum balance; one at
a monthly cost of $3 and the other with a $4 monthly fee.


fees include six checks per month, with a $.50 per check fee for
any checks beyond the six.
The two state member banks located in the neighborhoods
had no mortgage loan purchase applications, four applications for
refinancing, of which one was approved and three denied, and 25
home improvement loan applications (9 approved, 14 denied, 2

However, these statistics do not tell the entire

lending story for these institutions.
Both state member banks have mortgage cctrpany

In examining the HMDA. data, we also looked at the

target area’lending activity by these subsidiaries.

The mortgage

company subsidiaries received a total of 45 mortgage home
purchase loan applications, of which 40 were approved, 3 were
denied and 2 were withdrawn.

There were 99 applications for

mortgage loan refinancing in the target area, of which 73 were
approved, 8 were denied and 18 were withdrawn.
Federal Reserve Initiatives
I would now like to discuss some of the initiatives in
which the Federal Reserve Board is participating or initiating to
increase credit availability in low-income and minority

- 10 neighborhoods.
In response to concerns in the banking industry and
among potential borrowers, in March the federal banking agencies
issued a joint statement on credit availability which created a
special category for small and medium sized business and farm
loans which could be made with less documentation than is
normally required.
of a bank's capital.

The amount of such loans may not exceed 20%
It was our hope at the time that banks

would take advantage of this opportunity to increase the number
of small business loans in communities such as the target area.
However, it seems that only a few institutions are utilizing this
basket, possibly due to slack demand.
On June 10, the agencies announced additional credit
availability initiatives which included lessening paperwork and
regulatory burdens for financial institutions to encourage them
to make additional credit available (copy attached).


initiatives included revised valuations of collateral, better
coordination among the agencies of bank examinations, and
guidance on use of classification categories in commercial
These initiatives also included guidance on fair
lending and referred to an interagency letter issued in May.
This interagency letter on lending discrimination was signed by
the principals of all the federal banking regulatory agencies and
was sent to the chief executive officers of all banks, savings
and loans, and bank holding companies in the country.


- 11 stressed the serious nature of violations of anti-discrimination
laws and the importance of these issues to the regulatory

The letter also included guidance to the financial

institutions on steps that can be taken to insure that they are
complying with the relevant fair lending statutes and

The recommendations included the use of second

reviews for denied applications, mortgage review boards, and
compensation programs in financial institutions that provide
incentives to loan officers for loans made to low- and moderateincome minority applicants.
Further guidance to banks on discrimination issues is
included in the Federal Reserve Bank of Boston's brochure,
"Closing the Gap".

This creative pamphlet discusses

discrimination and provides advice to banks on ways to have an
effective program which serves the minority comnunities in a
bank's delineated area.

"Closing the Gap" is now in its third

printing and thousands of copies have been distributed to
financial institutions and others throughout the country.
The Federal Reserve is also emphasizing compliance with
fair lending statutes by improving examiner training and
examination techniques for these requirements.

We have developed

a special "HMDA data analysis system" which allows computer
analysis of the raw information to facilitate a better
understanding of the HMDA data.

This enables our examiners to go

beyond the normal HMDA tasks as they review lending activity in
cases where the analysis indicates a possible problem.


- 12 the data alone cannot provide evidence of discrimination, it may
indicate areas that need further explanation or investigation by
the examiners.
The HMDA data is also being used in a recently
developed computer model which allows examiners to match minority
and nonminority applicants with similar credit characteristics,
but different loan outcomes.

Once the pairs are selected, the

examiners will pull the identified files and determine the
factors used in the credit process.

This model is still being

tested in several Reserve Bank Districts, but initial feedback
shows great promise for use in fair lending examinations.
In addition to the HMDA. data, we now have a mapping
program which allows us to analyze several variables and present
them in an easy-to-read display.

Some of the capabilities of

this system are evident in the maps I have submitted that show
the race, income, and housing loans in the target area.
Another major initiative currently being undertaken by
the agencies is the Cornnunity Reinvestment Act (CRA) reform

The administration has requested that the regulatory

agencies review CRA and revise it to base it less on process and
paperwork and more on actual credit extended or


The agencies are working together on this project and are
presently engaged in gathering wide public input from bankers and
cornnunity groups.

Two meetings have been held, one with industry

trade associations and one with representatives of national
community advocacy organizations.

Additionally, principals of

- 13 the agencies have held seven public hearings on CRA in locations
throughout the country and gathered testimony from a wide variety
of large and small banks and thrifts, conntunity and other grass­
roots organizations, and public officials.
In response to the recent series of articles on lending
and banking services in the Washington Post, the Federal Reserve
Board and the Federal Reserve Bank of Richmond invited the chief
executives of the major financial institutions in the Washington
metropolitan area to an information session at the Board.


than 60 local bankers attended this program.
The session featured a presentation on the Delaware
Valley Mortgage Plan, an innovative bank consortium in
Philadelphia which offers single-family housing loans to low- and
moderate-income individuals and families.

The Plan has 11 bank

and thrift participants who have comnitted to offer creative
mortgage products to lower-income persons.

They also conrmit to

not reject applications until after a credit conrnittee for the
Plan has an opportunity to explore other methods of approving the

The Plan has made more than $270 million in mortgages to

roughly 16,500 families since 1975.

The President of the Federal

Reserve Bank of Richmond has confirmed the support of Reserve
Bank and Board staff for similar initiatives the local lenders
may wish to pursue.
Among the goals established for the Cotrmunity Affairs
program at the Federal Reserve Bank of Richmond is the
preparation of conmunity profiles of all the metropolitan and

- 14 major rural areas in the District.

The first profile, currently

being prepared, is for all of Prince Georges County, including
the target area that is the focus of these hearings.


profiles will describe the general credit needs of each area,
with specific focus on low- and moderate-income neighborhoods and
small businesses.

The profiles will also identify various

opportunities for financial institution investment.

By providing

demographic analysis and information on groups active in
community development, the profiles should help financial
institutions to respond positively to community reinvestment
After completion of the Prince Georges County profile,
the Corrmunity Affairs office will sponsor a training seminar in
comnunity development finance for financial institutions,
comnunity groups and public officials in the area.

This seminar

will promote public/private initiatives and opportunities in the
County and be a prototype for action as additional profiles are
In conclusion, I thank you for the opportunity to
testify today on this particular neighborhood in Prince Georges
County as well as methods for addressing credit availability
issues in other neighborhoods which include minority residents
and small businesses.

We recognize the importance of these

issues and look forward to working with you to address them.

Office of the Comptroller of the Currency
Joint Release
_____ Federal Deposit Insurance Corporation
___________________ Federal Reserve Board
_________________________________ Office of Thrift Supervision
For immediate release

Federal Regulators Announce
Additional Credit Availability Initiatives
June 10, 1993
The four federal regulators of banks and thrifts today announced six additional initiatives to
implement the President’s March 10 program to improve the availability of credit to businesses
and individuals. These initiatives include changes to regulatory reporting requirements and the
issuance of joint policy statements on the valuation of real estate collateral, use of the "Special
Mention" category in reviewing loans, and improved coordination of examinations. The
changes to regulatory reporting requirements are consistent with generally accepted accounting
principles (GAAP).
The agencies noted that these latest actions bring to a close the first phase of the President’s
credit availability program. However, all four agencies emphasized that they are continuing
efforts to reduce the paperwork and regulatory burden that impedes the flow of funds to
creditworthy borrowers.
The actions announced today cover these areas:

In-Substance Foreclosures
In the past, the agencies* rules required certain loans to be reported as in-substance
foreclosures. In the revised guidance issued today, the agencies make it clear that a
collateral dependent real estate loan need not be reported as foreclosed real estate unless
the lender has taken possession of the collateral. However, appropriate losses must be
recognized. This guidance is consistent with the approach taken by the Financial
Accounting Standards Board (FASB) in its new standard on loan impairment


Returning Nonaccrual Loans to Accrual Status
In the past, a loan that was partially charged off could not be returned to accrual status
until all missed payments had been made up to bring the loan to current status and the
institution expected to receive the full contractual principal and interest on the loan.

-2This reporting requirement also applied in situations where the borrower showed a
renewed ability and willingness to service the remaining debt Accordingly, institutions
sometimes found it difficult to work with borrowers who were experiencing temporary
difficulties in a way that would maximize recovery on these troubled loans.
To address this problem, the agencies are making two revisions to their nonaccrual
guidelines. First, banks and thrifts will be allowed to formally restructure troubled debt
in a manner that will allow a portion of the debt to become an accruing asset, provided
certain criteria are met This revised reporting guidance makes the policies of the bank
and thrift regulatory agencies consistent
Second, in some cases, borrowers have resumed paying the full amount of scheduled
contractual principal and interest payments on loans that are past due and in nonaccrual
status. Under the guidance issued today, banks and thrifts will be allowed to return
such past due loans to accrual status, provided the institution expects to collect all
principal and interest due and the borrower has made regular payments in accordance
with the terms of the loan over a specific period of time.

Regulatory Reporting Requirements for Sales of Other Real Estate Owned
The agencies will separately issue guidance to banks and thrifts that generally conforms
regulatory reporting requirements for sales of OREO with generally accepted accounting
principles (GAAP), as set forth in FASB Statement No. 66. These changes delete
certain requirements for minimum down payments for sales of OREO. Financial
institutions and examiners should refer to FASB Statement No. 66 for a detailed
discussion of the accounting principles that apply to sales of real estate.

Review and Classification of Commercial Real Estate Loans
The agencies are reaffirming their guidelines issued in November 1991 to ensure that
examiners are reviewing commercial real estate loans in a consistent, prudent and
balanced manner. Today’s policy statement reiterates that the evaluation of commercial
real estate loans is based on a review of the borrower’s willingness and capacity to
repay and on the income-producing capacity of the underlying collateral over time. The
statement emphasized that it is N O T regulatory policy to value collateral that underlies
real estate loans on a liquidation basis.

-3 ■

Supervisory Definition of Special Mention Assets
The agencies are concerned that improper use of the "Special Mention" loan category
in examiners’ reviews of loan portfolios may inhibit lending to small- and medium-size
businesses. Accordingly, all four agencies have adopted a uniform definition for this
The use of a common definition will lead to more consistent supervision among the
four agencies. It will also enable examiners to more readily segregate Special Mention
assets from those warranting adverse classification. The agencies have agreed to use
classified assets, which by definition do not include Special Mention assets, as the
standard measure in expressing the quality of a bank or thrift’s asset portfolio.


Coordination of Holding Company, Thrift and Bank Examinations
The four agencies are issuing interagency guidelines to coordinate their supervision and
examinations in order to minimize the disruptions and burdens associated with the
examination process. Under the principles laid out in the guidelines, the agencies will
work to eliminate duplication in examinations by multiple agencies. Examinations and
inspections of a particular legal entity will be conducted by the primary supervisor for
that entity. The agencies will increase coordination of examinations and will establish
procedures to centralize and streamline examinations in multibank organizations.

The initiatives announced today follow a number of actions previously taken by the four
agencies to implement the President’s credit availability program. Those actions include:

Interagency Policy Statement on Documentation of Loans (March 30, 1993)


Interagency Letter on Lending Discrimination (May 27, 1993)


Proposed Rule on Revised Appraisal Requirements (June 4, 1993)


Interagency Release on Joint Fair Lending Initiatives (June 10, 1993)

The four agencies emphasized that they will continue their efforts to reduce paperwork and
regulatory burdens and improve the ability of small businesses and consumas to gain access
to credit For example, in the coming months, the agencies expect to modify their procedures
for corporate applications (e.g., applications for charters, mergers, and branches) to make diem
less duplicative and more uniform.


Office of the Comptroller of the Currency
Joint Statement
_____ Federal Deposit Insurance Corporation
■_______________ Federal Reserve Board
_________________________________ Office of Thrift Supervision
For immediate release

Interagency Guidance on
Reporting of In-Substance Foreclosures
June 10, 1993

On March 10, 1993, the four federal banking and thrift regulatory agencies issued an
Interagency Policy Statement on Credit Availability. That statement indicated that the agencies
would seek to clarify the reporting treatment for in-substance foreclosures (ISF) and would
work with the accounting authorities to achieve consistency between generally accepted
accounting principles (GAAP) and regulatory reporting requirements in this area.
Under existing accounting guidelines for determining whether the collateral for a loan has been
in-substance foreclosed, a lpan is transferred to "other real estate owned" (OREO or REO) and
appropriate losses are recognized if certain criteria are met Such OREO designations may
impede efforts to improve credit availability and may discourage lenders from working with
borrowers experiencing temporary financial difficulties.
The Financial Accounting Standards Board (FASB) recently issued Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," addressing the accounting for impaired
loans. This Standard also clarifies the existing accounting for in-substance foreclosures. Under
the new impairment standard and related amendments to Statement No. IS," Accounting by
Debtors and Creditors for Troubled Debt Restructurings" (FAS 15), a collateral dependent real
estate loan (i.e., a loan for which repayment is expected to be provided solely by the
underlying collateral) would be reported as OREO only if the lender had taken possession of
the collateral. For other collateral dependent real estate loans, loss recognition would be based
on the fair value1 of the collateral if foreclosure is probable. However, such loans would no
longer be reported as OREO. Rather, they would remain in the loan category.

1Fair value is defined in paragraph 13 of FAS 15.

Accordingly, the agencies have concluded that losses2 must be recognized on real estate loans
that meet the existing ISF criteria based on the fair value of the collateral, but such loans need
not be reported as OREO unless possession of the underlying collateral has been obtained. The
agencies believe that this interagency guidance, coupled with other agency actions currently
being taken, will reduce impediments to the availability of credit


2 Consistent with GAAP, loss recognition would consider estimated costs to sell.

Office of the Comptroller of the Currency
Joint Statement
_____ Federal Deposit Insurance Corporation
____________________Federal Reserve Board
________________________________ Office of Thrift Supervision
For immediate release

Revised Interagency Guidance on
Returning Certain Nonaccrual Loans to Accrual Status
June 10, 1993

On March 10, 1993, the four federal banking agencies issued an Interagency Policy Statement
on Credit Availability. That policy statement outlined a program of interagency initiatives to
reduce impediments to the,availability of credit to businesses and individuals.
As part of that program, the agencies are making two revisions to existing policies for
returning certain nonaccrual loans to accrual status. The revised policies should remove
impediments to working with borrowers who are experiencing temporary difficulties in a
manner that maximizes recovery on their loans, while at the same time improving disclosures
in this area.
The first change conforms the banking and thrift agencies’ policies on troubled debt
restructurings (TDRs) that involve multiple notes (sometimes referred to as "A V B " note
structures). The second change would permit institutions to return past due loans to accrual
status, provided the institution expects to collect all contractual principal and interest due and
the borrower has demonstrated a sustained period of repayment performance in accordance
with the contractual terms.
The revised policies are effective immediately. Thus, institutions may elect to adopt such
changes for purposes of the June 30, 1993, Consolidated Reports of Condition and Income
(Call Report) and Thrift Financial Report (TFR). Revised Call Report and TFR instructions
will be distributed as of September 30, 1993.


TDR Multiple Note Structure
The agencies are conforming their reporting requirements for TD R structures involving
multiple notes. The basic example is a troubled loan that is restructured into two notes where
the first or "A" note represents the portion of the original loan principal amount which is
expected to be fully collected along with contractual interest. The second part of the
restructured loan, or "B" note, represents the portion of the original loan that has been charged
Such TDRs generally may take any of three forms. (1) In certain TDRs, the "B" note may be
a contingent receivable that is payable only if certain conditions are met (e.g., sufficient cash
flow from the property). (2) For other TDRs, the "B" note may be contingently forgiven (e.g.,
note "B" is forgiven if note "A" is paid in full). (3) In other instances, an institution would
have granted a concession (e.g., rate reduction) to the troubled borrower but the "B" note
would remain a contractual obligation of the borrower. Because the "B" note is not reflected
as an asset on the institution's books and is unlikely to be collected, the agencies have
concluded that for reporting purposes the "B" note could be viewed as a contingent receivable.
Institutions may return the "A" note to accrual status provided the following conditions are

The restructuring qualifies as a TDR as defined by FASB Statement No. 15,
"Accounting, by Debtors and Creditors for Troubled Debt Restructuring," (SFAS
15) and there is economic substance to the restructuring. (Under SFAS 15, a
restructuring of debt is considered a TDR if "the creditor for economic or legal
reasons related to the debtor's financial difficulties grants a concession to the
debtor that it would not otherwise consider.")


The portion of the original loan represented by the "B" note has been charged
off. The charge-off must be supported by a current, well documented credit
evaluation of the borrower’s financial condition and prospects for repayment
under the revised terms. The charge-off must be recorded before or at the time
of the restructuring.


The "A" note is reasonably assured of repayment and of performance in
accordance with the modified terms.


In general, the borrower must have demonstrated sustained repayment
performance (either immediately before or after the restructuring) in accordance
with the modified terms for a reasonable period prior to the date on which the
"A" note is returned to accrual status. A sustained period of payment
performance generally would be a minimum of six months and involve
payments in the form of cash or cash equivalents.

Under existing reporting requirements, the "A" note would be disclosed as a TDR. In
accordance with these requirements, if the "A" note yields a market rate of interest and
performs in accordance with the restructured terms, such disclosures could be eliminated in the
year following the restructuring. To be considered a market rate of interest, the interest rate
on the "A” note at the time of the restructuring must be equal to or greater than the rate that
the institution is willing to accept for a new receivable with comparable risk.

Nonaccrual Loans That Have Demonstrated Sustained Contractual Performance
Certain borrowers have resumed paying the full amount of scheduled contractual interest and
principal payments on loans that are past due and in nonaccrual status. Although prior
arrearages may not have been eliminated by payments from the borrowers, some borrowers
have demonstrated sustained performance over a period of time in accordance with the
contractual terms. Under existing regulatory standards, institutions cannot return these loans
to accrual status unless they expect to collect all contractual principal and interest and the loans
are brought fully current (or unless the loan becomes well secured and in the process of
Such loans may henceforth be returned to accrual status, even though the loans have not been
brought fully current, provided two criteria are met: (1) all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment within a
reasonable period, and (2) *there is a sustained period of repayment performance (generally a
minimum of six months) by the borrower, in accordance with the contractual terms involving
payments of cash or cash equivalents. Consistent with existing guidance, when the regulatory
reporting criteria for restoration to accrual status are met, previous charge-offs taken would not
have to be fully recovered before such loans are returned to accrual status.
Loans that meet the above criteria would continue to be disclosed as past due (e.g., 90 days
past due and still accruing for Call Report and TFR purposes), as appropriate, until they have
been brought fully current

Additional Guidance
The Financial Accounting Standards Board (FASB) recently issued Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," which establishes a new approach for
recognizing impairment on problem loans and for recognizing income on such loans. In
addition, the standard establishes new disclosure requirements for impaired loans for financial
reporting purposes. In light of the significance of those changes, the agencies are reevaluating
regulatory disclosure and nonaccrual requirements that will apply when the statement becomes
effective, and expect to issue revised policies at a later date.


Joint Release

Office of the Comptroller of the Currency
Federal Deposit Insurance Corporation
___________________ Federal Reserve Board
_______________ Office of Thrift Supervision
For immediate release

Interagency Policy Statement on
Review and Classification of Commercial Real Estate Loans
June 10, 1993
On March 10, 1993, the four federal regulators of banks and thrifts issued an Interagency
Policy Statement on Credit Availability. This policy statement outlined a program of
interagency initiatives to reduce impediments to making credit available to businesses and
One impediment to making credit available to commercial real estate borrowers may be
problems in evaluation of real estate collateral. The federal bank and thrift regulatory agencies
have been working with their examination staffs for some time to ensure that commercial real
estate loans are evaluated in accordance with agency policy. In issuing today’s policy
statement, the federal bank and thrift regulatory agencies are reaffirming the guidelines in the
November 7, 1991 Interagency Policy Statement on the Review and Classification of
Commercial Real Estate Loans. The November 7, 1991 policy statement provides clear and
comprehensive guidance to ensure supervisory personnel are reviewing commercial real estate
loans in a consistent, prudent and balanced manner. A copy of that statement is attached.
The November 7, 1991 statement clarified regulatory policy on real estate valuation and
classification. The evaluation of commercial real estate loans is based on a review of the
borrower’s willingness and capacity to repay and on the income-producing capacity of the
underlying collateral over time. The value of collateral increases in importance as a loan
becomes troubled and the borrower’s ability to repay the loan becomes more questionable. The
statement emphasizes that it is N O T regulatory policy to value collateral ¿at underlies real
estate loans on a liquidation basis. (See the discussion on "Examiner Review of Individual
Loans, Including the Analysis of Collateral Value," beginning on page 3 of the policy
Furthermore, the policy statement discusses management’s responsibility for reviewing
appraisal assumptions and conclusions for reasonableness. Appraisal assumptions should not
be based solely on current conditions that ignore the stabilized income-producing capacity of
the property.

-2 -

Management should adjust any assumptions used by an appraiser in determining values that
are overly optimistic or pessimistic. The policy statement also indicates that the assumptions
used in a discounted cash flow analysis (such as discount rates and direct capitalization rates)
should reflect reasonable expectations about the rate of return that investors require under
normal, orderly and sustainable market conditions. Unrealistic or unsustainable high or low
discount rates, "cap" rates, and income projections should not be used.
The use of appropriate assumptions in a discounted cash flow analysis is particularly important
in determining the value of collateral for a troubled, project-dependent commercial real estate
loan (involving income-producing property). The agencies use this valuation for determining
the amount of the loan that is adequately secured by the value of the collateral. The November
7, 1991 Interagency Policy Statement indicates that generally, any portion of the loan balance
that exceeds the amount adequately secured by collateral values and that can be clearly
identified as uncollectible should be classified "loss." The portion of the loan balance that is
adequately secured by the value of the collateral should generally be classified no worse than
"substandard." The policy statement also indicates that, when an institution has taken a chargeoff in sufficient amount so that the remaining recorded balance of the loan (a) is being serviced
(based on reliable sources) and (b) is reasonably assured of collection, classification of the
remaining recorded balance may not be appropriate.
The federal bank and thrift regulatory agencies will continue to ensure their examiners
implement the policy statement appropriately and uniformly. Each agency has an appeals
process for institutions \sith significant concerns'about examinations, including any concerns
relating to the supervisory treatment of commercial real estate loans.


Interagency Policy Statement on Review and Classification of Commercial Real
Estate Loans, November 7, 1991


Office of the Comptroller of the Currency
Joint Statement
_____ Federal Deposit Insurance Corporation
__ _________________ Federal Reserve Board
_________________________________ Office of Thrift Supervision
For immediate release

Interagency Statement on the
Supervisory Definition of Special Mention Assets
June 10, 1993
The March 10, 1993 Interagency Policy Statement on Credit Availability indicated the federal
banking and thrift regulatory agencies would issue guidance clarifying use of the Special
Mention definition for regulatory supervision purposes. The four agencies have agreed on the
definition of "Special Mention" as stated below. This definition should also be considered by
an institution when performing its own internal asset review.
The definition of Special Mention is as follows:
A Special Mention asset has potential weaknesses that deserve management’s
close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the asset or in the institution’s credit
position at some future date. Special Mention assets are not adversely classified
and do not expose an institution to sufficient risk to warrant adverse
In the past, the agencies used different terminology and definitions for Special Mention.
Supervisory reports and their contents also varied between agencies. The use of a common
definition will lead to more consistent application of supervisory procedures. The definition
will also enable examiners to more readily segregate Special Mention assets from those
warranting adverse classification. It will also ensure that the Special Mention category is not
used to identify an asset which has as its sole weakness credit data exceptions or collateral
documentation exceptions that are not material to the repayment of the asset
The agencies are in the process of developing examiner guidance explaining how the Special
Mention category will be used in the assessment of the overall condition of an institution. The
agencies have agreed to conform their policies and guidance to the following principles:




Classified assets, which by definition do not include Special Mention assets, will
be the standard measure used in expressing the quality of a bank or thrift’s loan
portfolio and other assets. The agencies will not express asset quality in terms
of "criticized assets," a term that is generally recognized as including both
Special Mention and classified assets.


The agencies will ensure their policies, examiner guidance, and internal
monitoring systems do not call for internal reporting of criticized asset totals or
percentages. However, examiners will continue to consider the level and trends
of assets categorized as Special Mention in their analysis as appropriate.


In implementing Section 132 of the FDIC Improvement Act, Standards for
Safety and Soundness, the agencies will use classified assets and not use
criticized assets as a measure of asset quality.


Special Mention assets will not be combined with classified assets in reports of
examination or in corporate applications.

Each agency will make appropriate revisions to its examiner guidance, and all will work to
ensure their guidance is consistent among the agencies. The guidance will emphasize that it
is inappropriate to use the Special Mention category to capture loans solely because of their
nature or type, such as small business lending or affordable housing lending.
Implementation of the revised definition will be effective immediately. Examiner guidance will
be forthcoming shortly.


Office of the Comptroller of the Currency
Joint Statement
_____ Federal Deposit Insurance Corporation
___________________ Federal Reserve Board
__________________ _______________Office of Thrift Supervision

Interagency Policy Statement on
Examination Coordination and Implementation Guidelines
June 10, 1993
This statement outlines a program for coordinating examinations of insured depository
institutions and inspections of their holding companies by the federal financia regulatory
agencies. This program expands on existing interagency agreements, and responds to the
industry’s concern over the increased burden on organizations supervised by multiple regulatory
The objective of the program is to minimize disruption and avoid duplicative examination efforts
and information requests, whenever possible. The significant elements of the program include:

Coordinating the planning, timing and scope of examinations and inspections of
federally insured depository institutions and their holding companies;


Conducting joint interagency examinations or inspections, when necessary;


Coordinating and conducting joint meetings between bank or bank holding
company management and the regulators;


Coordinating information requests; and


Coordinating enforcement actions, when appropriate.

The program emphasiy^g full cooperation and coordination by the agencies in supervisinglarge
banking organizations and organizations that are in a less than satisfactory condition. Additional
effort will also be made to reduce the regulatory burden on the remaining population of
depository institutions.
Guidelines for implementation of the program are attached.



These guidelines were developed to strengthen coordination and cooperation among the
federal banking agencies in examining and supervising banking organizations and to carry out
the provisions of the March 10 Interagency Policy Statement intended to minimire the
disruptions and burdens associated with the examination process. The provisions are:

Eliminate duplication in examinations by multiple agencies, unless
clearly required by law;


Increase coordination of examinations among agencies when duplication
is required; and


Establish procedures to centralize and streamline examinations in
multibank organizations.

These guidelines address the coordination of the examinations by federal agencies of
depository institutions and the inspections of their holding companies. To achieve the desired
strengthening in the coordination of the federal agencies' examination/inspection activities,
the guidelines focus on the planning, staffing, timing and conduct of examinations and
inspections; the conduct of joint management meetings to discuss inspection and examination
findings; and other areas of mutual concern.



Examinations/inspections of a particular legal entity will be conducted by the federal
regulatory agency that has primary supervisory authority for that entity. In carrying out its
supervisory responsibilities for a particular entity within a banking organization, each
regulatory agency will rely on examinations/inspections conducted by the primary regulator
of the affiliate to the extent possible, thereby avoiding unnecessary duplication and disruption
to the banking organization. In certain situations, however, it may be necessary for a
regulatory agency other than the entity’s primary supervisory authority to participate in the
examination or inspection of the entity in order to fulfill its regulatory responsibilities.
These guidelines provide procedures for handling such situations.
Primary supervisory authority and coordination responsibilities are organized as follows:

national banks;


state nonmember banks;


thrift holding companies and savings associations; and


parent bank holding companies, nonbank subsidiaries of bank
holding companies, the consolidated bank holding company and
state member banks.

The primary federal regulator is responsible for scheduling, staffing and setting the scope of
supervisory activities, including coordinating formal and informal administrative actions, as
necessary. In fulfilling these responsibilities, the primary regulatory agency should consult
closely with the other appropriate agencies when there is need for coordination.



The agencies will make every effort to coordinate the examinations and the inspections of
banking organizations. Coordinated examinations and inspections may not be practical in all
cases because of resource constraints, serious scheduling conflicts, or geographic
considerations; however, particular emphasis for implementing this program will be placed
on hanking organizations with over $10 billion in consolidated assets and those banking
organizations (generally, with assets in excess of $1 billion) that exhibit financial weaknesses.



Where multiple regulators have authority over a legal entity, representatives from the
appropriate supervisory offices should meet quarterly as necessary to discuss supervisory
strategies for specific banking organizations, and at least annually to review and establish
examination and inspection schedules, to plan for the next year, and to consider the need for
coordination in the following areas:

Sharing the strategy and scope of each examination/inspection;


Determining if agencies other than the primary regulator of a particular
entity should participate in the examination/inspection of that entity;


Determining whether a consolidated request letter should be prepared to
avoid duplicative information requests;


Sharing examination/inspection work papers and resulting findings and
conclusions from prior examination/inspection efforts; or


Other areas as necessary.




Certain areas or functions transcend legal entity distinctions, such as internal audit, credit
review and the methodology for determining the allowance for loan and lease losses. Such
functions may be located at the bank or holding company level. The primary regulator of
the depository institution and the holding company may both have supervisory responsibility
to assess such functions. In these cases, examinations or inspections of such areas should be
conducted on a coordinated and concurrent basis to avoid duplicative reviews and
unnecessary disruption.
The primary regulator of the entity being examined/inspected should take the lead on such a
coordinated examination or inspection, unless there is mutual agreement that another agency
will serve as the lead agency. The responsibilities of the lead agency, in consultation with
other appropriate agencies, include developing the scope of the examination or inspection and
determining the staff requirements. The lead agency will also coordinate
examination/inspection scheduling and the presentation of examination/inspection findings to
the appropriate management.



At the conclusion of examinations and inspections conducted under these guidelines, the
agencies should coordinate and plan joint meetings with the board of directors to discuss the
findings and conclusions. ' Agencies will be guided by the coordination responsibility
definitions outlined in Provision 2 of this program, unless otherwise agreed upon.



Prior to forwarding examination and inspection results to management or boards of directors,
every effort should be made to resolve any significant differences concerning major
findings, conclusions and recommendations.
Such differences should be resolved by examiners, or officials at the regional level, within 10
business days of identification. If resolution cannot be achieved following full review and
communication between the regional offices, the matter should be referred to the national
level, where it will be resolved within a reasonable time frame.




The primary regulator will prepare the formal report of examination or inspection covering
the entity for which it is the primary federal regulator and in those cases for which it serves
as the lead agency. The report should be addressed and transmitted to the directors of the
entity for which the regulator is the primary federal supervisory authority and, as necessary,
it may be sent to the directors of other entities that have a need for the information. The
agencies may mutually agree, if necessary and appropriate, to prepare a joint report.



Any request for information to be obtained from an entity for supervisory purposes should
normally be made through the entity’s primary regulator. The primary regulator should also
share relevant supervisory information with die other appropriate regulatory agencies.



When enforcement action is contemplated by one or more regulatory agencies, consideration
should be given to initiating a joint enforcement action to address and correct deficiencies
within a banking organization. At a minimum, each agency considering enforcement action
should inform other regulatory agencies. This provision reaffirms the existing interagency
enforcement agreement t



The agencies will establish arrangements to monitor coordination efforts and to resolve any
differences that arise under this program.
The agencies will also endeavor to coordinate with state banking departments, where
appropriate and feasible.

June 10, 1993


Office of the Comptroller of the Currency
Joint Release
_____ Federal Deposit Insurance Corporation
___________________ Federal Reserve Board
_________________________________ Office of Thrift Supervision
For immediate release

Interagency Policy Statement on
Fair Lending Initiatives
June 10, 1993
The four financial institution regulatory agencies are announcing initiatives that they
will pursue over the next several months to enhance their ability to detect lending
discrimination, to improve the level of education they provide to the industry and to
their examiners, and to strengthen fair lending enforcement
A number of interagency efforts are already completed or are under way to improve fair
lending detection techniques, enforcement, and education. For example:

The agencies have issued a joint statement to financial institutions that reaffirms
their commitment to the enforcement of the fair lending laws and provides the
industry with guidance and suggestions on fair lending matters.


The agencies are working on a revised supervisory enforcement policy for
dealing with violations of the Equal Credit Opportunity and Fair Housing Acts.
This revised policy will replace a policy issued in 1981. The revised policy
specifies corrective actions for several different substantive violations of the


The agencies are developing uniform fair lending examination procedures and
training programs. Hie agencies believe these new procedures will significantly
strengthen existing discrimination detection programs. These new examination
procedures will be publicly available this summer.

New Initiatives
The four agencies will pursue the following new initiatives over the next several

- 2 -

Fair Lending Training for Examiners
The agencies will develop a new training program in fair lending for
experienced compliance examiners that will be conducted on a regional basis.
A pilot program could be held as early as Fall 1993.

Fair Lending Seminar for Industry Executives
The agencies will develop and sponsor regional fair lending programs for top
level industry executives (chief executive officers and executive vice presidents)
to explain their efforts to enforce fair lending laws and to foster additional
sensitivity and awareness among lenders about discrimination issues, specifically
subtle practices that impede the availability of credit to low-income and minority
individuals. The first session of this program could be held later this year.

Alternative Discrimination Detection Methods
The agencies will explore statistically-based discrimination analysis models.
These models may help identify loan applications files for review as part of the
examination process. This will significantly enhance the agencies’ abilities to
identify loan applicants that may have received differential treatment

Stronger Enforcement of Fair Lending Laws
Each agency will implement an internal process for making referrals to the
Department of Justice for violations of the Equal Credit Opportunity Act These
internal procedures will ensure that appropriate cases are being put forth for
consideration by senior management

Improved Consumer Complaint Programs
The agencies believe that refinements to their consumer complaint systems can
also better promote the broad availability of credit on a non-discriminatory basis.
During the next few months, each agency will evaluate the effectiveness of its
consumer complaint system in detecting and correcting credit discrimination, and
alerting the agencies to industry practices that may inhibit the free flow of
credit Each agency will announce its own specific initiatives in these areas.