[Federal Register Volume 62, Number 177 (Friday, September 12, 1997)]
[Notices]
[Pages 48089-48092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24235]


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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL


Uniform Retail Credit Classification Policy

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Notice and request for comment.

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SUMMARY: 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), under 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 preliminary 
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 recommendations for 
changing the policy statement; data that would help quantify the 
financial or business impact on financial institutions if the existing 
policy was revised; and an estimate of the time frames necessary for

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an institution to successfully implement the revisions. 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.

DATES: Comments must 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, 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; Ron Shimabukuro, Senior Attorney, Legislative and 
Regulatory Activities Division, Office of the Comptroller of the 
Currency (202) 874-5090, 250 E Street SW, Washington, DC 20219.
    OTS: William 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, 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. The OTS 
adopted the policy in 1987. The policy was issued to establish uniform 
guidelines for the classification of instalment credit based on 
delinquency status. While the 1980 policy recognized the statistical 
validity of measuring losses predicated on past due status, the 1980 
policy also permitted exceptions to the classification policy in 
situations where significant amounts were involved or when a loan was 
well secured and in the process of collection.
    A fundamental objective of the 1980 policy is the timely 
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 charge-offs related to consumer 
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 many of these accounts and the 
inconsistent way in which 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 for Open-End and Closed-End Credit

    The agencies recognize the inconsistency between the level of risk 
associated with open-end and closed-end credit and the policy for 
charging-off delinquent accounts. Under the 1980 policy, open-end 
credit, which is generally unsecured, should be charged-off when an 
account is 180 days delinquent. Conversely, closed-end credit, which 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 
market for open-end credit evolved.
    In 1980, open-end credit generally consisted of credit card 
accounts with small credit lines that limited the exposure an 
institution had to an individual borrower. In today's environment, 
open-end credit generally includes accounts with much larger lines of 
credit and higher risk levels. The change in the nature of these 
accounts, combined with the variety of charge-off practices examiners 
recently encountered, raised the concern of the agencies. To address 
this concern, the FFIEC is seeking public comment on whether a charge-
off policy that is more consistent with the risk associated with open-
end and closed-end accounts should be adopted and if so, what that 
policy should be. Specifically, the FFIEC requests comment on:
    (1)(a) Should a uniform time frame be used to charge-off both open-
end and closed-end accounts?
    (1)(b) If so, what should that time frame be?
    (1)(c) If a uniform time frame for both types of credit is not 
considered appropriate, what time frames are reasonable for charging 
off open-end credit and closed-end credit? Please explain.
    (1)(d) If there was a change in the time frames for charging-off 
delinquent accounts, what is a reasonable time frame to allow 
institutions to comply with such a change?
    (1)(e) Should the current regulatory practice be continued of 
classifying open-end and closed-end credit Substandard when the account 
is 90 days or more delinquent? If not, what alternative would you 
suggest? Please explain the benefits of a suggested alternative.
    (1)(f) Should a standard for the Doubtful classification be adopted 
and, if so, what should be the standard and why?
    (1)(g) Currently, no requirement 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 many days delinquent 
should open-end credit and closed-end credit be placed on a nonaccrual 
status?
    (1)(h) An alternative to a requirement 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, when should it be established? Please discuss the 
advantages and disadvantages of such a proposal.

(2) Bankruptcy, Fraud, and Deceased Accounts

    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 when an 
account should be charged-off for Chapter 7 bankruptcies and Chapter 13 
bankruptcies? If so, what 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 borrower has filed for bankruptcy, the 
date that the bankruptcy trustee

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meets with the creditors, or some other date? Please explain why one 
date is better than another.
    (2)(c) How much 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 immediate charge off, would it be 
beneficial to set up a specific reserve account at the time 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 much time is needed by an 
institution to charge-off losses due to loan fraud?
    (2)(f) Subsequent to notification, how much time is needed by an 
institution to charge-off losses on loans to deceased borrowers?

(3) Partial Payments

    The 1980 policy includes a provision that 90 percent of a 
contractual payment will be considered a full payment. However, if less 
than 90 percent is received, no recognition of any payment is given. 
The FFIEC is considering eliminating this policy provision and giving 
credit for any partial payments received. If such a change is adopted, 
a loan will be considered one month delinquent when the sum of the 
missed portions of the payments equals one full payment. A series of 
partial payments could result in accumulating delinquencies. 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, or three full months delinquent.
    (3)(a) Should borrowers receive credit for partial payments in 
determining delinquency using the method described? If so, would such a 
change require significant computer programming changes? Are there 
other reasonable alternatives?
    (3)(b) If partial payments are allowed, how should the payment be 
applied?
    (3)(b)(1) 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 payment programs. Fixed 
payment accounts are accounts for which a payment 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 payment 
programs? What 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 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, 
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 when it is based on recent, 
satisfactory performance and other positive credit factors of the 
borrower and when it is structured in accordance with prudent 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 
consumer loan portfolio. The following standards are under 
consideration:
    (4)(a) The borrower shows a renewed willingness and ability to 
repay the loan. Is this standard appropriate?
    (4)(b) The borrower makes a certain number of contractual payments 
or the equivalent amount. How many payments are appropriate?
    (4)(c) The loan can only be re-aged, extended, renewed, or deferred 
once within a specified time. What time frame is appropriate? Should 
there be a limit to the number of re-agings over the life of an 
account? If so, what should that limit be?
    (4)(d) The account must be in existence for a certain period of 
time before it can be re-aged, extended, renewed, or deferred. What 
time period is appropriate?
    (4)(e) The loan balance should not exceed the predelinquency credit 
limits (last limit approved by bank). Is this standard appropriate?
    (4)(f) Other. What other standards should be considered?

(5) Residential and Home Equity Loans

    No FFIEC uniform classification policy exists for residential and 
home equity loans. Since most of these loans are underwritten 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.
    As the delinquency progresses, repayment becomes dependent on the 
sale of the real estate collateral. For collateral dependent loans, 
GAAP requires that any loan amount 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 within a prescribed delinquency time frame to determine 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, what should that delinquency 
be?
    (5)(b) Should the FFIEC require a collateral evaluation at a 
certain delinquency? If so, what should that delinquency time frame be?

(6) Need for Additional Retail Credit Guidance

    The FFIEC notes that classification policies are just one component 
of prudent loan portfolio management. Classification policies, by 
themselves, do not address potential problems or weaknesses that may 
exist in the origination and underwriting of such loans.
    (6)(a) What type of additional supervisory guidance is needed or 
would be beneficial to address this or other aspects of retail credit 
portfolio management?
    (6)(b) Should there be additional supervisory guidance on the loan 
loss reserve for retail credit?

(7) Industry Experience and Impact

    The FFIEC welcomes comment on any other issues that it should 
consider in updating this policy. Additionally, the FFIEC would benefit 
from receiving financial institutions' data on their charge off and 
recovery experience rates for charged-off open-end credit, closed-end 
credit, loans in bankruptcy, fraudulent loans, or loans of deceased 
persons. The FFIEC is also interested in understanding the financial 
and business practice impact that these policy changes may have. 
Revisions to the 1980 policy may result in changes to the Call Report, 
which may require banks to make reporting system changes. If an 
institution's recommendations 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

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management. Please comment on how the FFIEC should treat such loans.

    Dated: September 9, 1997.
Joe M.Cleaver,
Executive Secretary, Federal Financial Institutions Examination 
Council.
[FR Doc. 97-24235 Filed 9-11-97; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P