[Federal Register Volume 65, Number 113 (Monday, June 12, 2000)]
[Notices]
[Pages 36903-36906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14704]


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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL


Uniform Retail Credit Classification and Account Management 
Policy

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Final notice.

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SUMMARY: The Federal Financial Institutions Examination Council 
(FFIEC), on behalf of the Board of Governors of the Federal Reserve 
System (FRB), the Federal Deposit Insurance Corporation (FDIC), the 
Office of the Comptroller of the Currency (OCC), and the Office of 
Thrift Supervision (OTS), collectively referred to as the Agencies, is 
publishing revisions to the Uniform Retail Credit Classification and 
Account Management Policy, to clarify certain provisions, especially 
regarding the re-aging of open-end accounts and extensions, deferrals, 
renewals, and rewrites of closed-end loans. The National Credit Union 
Administration (NCUA), also a member of FFIEC, does not plan to adopt 
the Uniform Policy at this time. This Policy is a supervisory policy 
used by the Agencies for uniform classification and treatment of retail 
credit loans in financial institutions.

DATES: Any changes to an institution's policies and procedures as a 
result of the Uniform Retail Credit Classification and Account 
Management Policy issued on February 10, 1999, as modified by these 
revisions, should be implemented for reporting in the December 31, 
2000, Call Report or Thrift Financial Report, as appropriate.

FOR FURTHER INFORMATION CONTACT:
    FRB: David Adkins, Supervisory Financial Analyst, (202) 452-5259, 
or Anna Lee Hewko, Financial Analyst, (202) 530-6260, 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), Diane Jenkins, (202) 452-3544, Board of Governors 
of the Federal Reserve System, 20th and C Streets, N.W., Washington, 
D.C. 20551.
    OCC: Daniel L. Pearson, National Bank Examiner, (202) 874-5170, 
Credit Risk Division, or Ron Shimabukuro, Senior Attorney, (202) 874-
5090, Legislative and Regulatory Activities Division, Chief Counsel's 
Office, Office of the Comptroller of the Currency, 250 E Street, SW., 
Washington, DC 20219.
    FDIC: James Leitner, Examination Specialist, (202) 898-6790, 
Division of Supervision, or Michael Phillips, Counsel, (202) 898-3581, 
Supervision and Legislation Branch, Legal Division, Federal Deposit 
Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.
    OTS: William J. Magrini, Senior Project Manager, (202) 906-5744, 
Donna M. Deale, Manager, Supervision Policy, (202) 906-7488, 
Supervision Policy, or Ellen J. Sazzman, Counsel (Banking and Finance), 
(202) 906-7133, Regulations and Legislation Division, Chief Counsel's 
Office, Office of Thrift Supervision, 1700 G Street, N.W., Washington, 
D.C. 20552.

SUPPLEMENTARY INFORMATION:

Background Information

    On June 30, 1980, the FRB, FDIC, and OCC adopted the Uniform Policy 
for Classification of Consumer Installment Credit Based on Delinquency 
Status (1980 policy). The Federal Home Loan Bank Board, the predecessor 
of the OTS, adopted the 1980 policy in 1987. The 1980 policy 
established uniform guidelines for the classification of retail 
installment credit based on delinquency status and provided charge-off 
time frames for open-end and closed-end credit.
    The Agencies undertook a review of the 1980 policy as part of their 
review of all written policies mandated by Section 303(a) of the Riegle 
Community Development and Regulatory Improvement Act of 1994. As a 
result of this review, on February 10, 1999 (64 FR 6655), the Agencies 
issued the Uniform Retail Credit Classification and Account Management 
Policy (Uniform Policy). In general, the Uniform Policy:
     Established a charge-off policy for open-end credit at 180 
days delinquency and closed-end credit at 120 days delinquency.
     Provided guidance for loans affected by bankruptcy, fraud, 
and death.
     Established guidelines for re-aging, extending, deferring, 
or rewriting past due accounts.
     Provided for classification of certain delinquent 
residential mortgage and home equity loans.
     Provided an alternative method of recognizing partial 
payments.
    As issued on February 10, 1999, the Uniform Policy was effective 
for manual adjustments to an institution's policies and procedures as 
of the June 30, 1999, Call Report or Thrift Financial Report, as 
appropriate. In addition, the Uniform Policy allowed institutions until 
the December 31, 2000, Reports to make changes involving computer 
programming resources. In a modification issued on November 23, 1999 
(64 FR 65712), the implementation date for manual changes was extended 
to the December 31, 2000, Reports.
    Following the issuance of the Uniform Policy, the Agencies received 
numerous inquiries for clarifications of the standards contained in the 
Policy, especially with respect to the re-aging of open-end accounts 
and extensions, deferrals, renewals, or rewrites of closed-end loans. 
In response to these inquiries for clarification, the Agencies have 
decided to publish this revised Uniform Policy. In addition to various 
editorial changes, the Agencies have changed the Uniform Policy to 
clarify various items in the Uniform Policy with respect to (1) the re-
aging of open-end accounts; (2) extensions, deferrals, renewals, and 
rewrites of closed-end loans; (3) examiner considerations; and (4) the 
treatment of specific categories of retail loans.
    1. Re-aging of open-end accounts. The Uniform Policy provided that 
open-end accounts should not be re-aged more than once within any 
twelve-month period and no more than twice within any five-year period. 
The Agencies have decided to clarify the Uniform Policy by stating that 
institutions may adopt a more conservative re-aging standard (e.g., 
some institutions allow only one re-aging in the lifetime of an open-
end account). In addition, this modification of the Uniform Policy 
recognizes the importance of formal workout programs and provides 
guidance on the handling of open-end accounts that enter into this type 
of program.
    Specifically, the Agencies have modified the Uniform Policy to 
provide that institutions may re-age an account after it enters a 
workout program, including internal and third-party debt counseling 
services, but only after receipt of at least three consecutive minimum 
monthly payments or the equivalent cumulative amount. Re-aging for 
workout program purposes is limited to once in a five-year period and 
is in addition to the once-in-twelve-months/twice-in-five-years 
limitation. The term ``re-age'' is defined in the document (in footnote 
3) to mean ``returning a delinquent, open-end account to current status 
without collecting the total amount of principal, interest, and fees 
that are contractually due.'' In the Agencies' view, management 
information systems should track the principal reductions and charge-
off history of loans in workout programs by type of program.

[[Page 36904]]

    2. Extensions, deferrals, renewals, and rewrites of closed-end 
loans. The Agencies have modified the Uniform Policy to provide that 
institutions should adopt and adhere to explicit standards that control 
the use of extensions, deferrals, renewals, and rewrites of closed-end 
loans. Such standards would be based on the borrower's willingness and 
ability to repay the loan and would limit number and frequency of such 
treatment of closed-end loans. The Agencies have also defined the terms 
``extension,'' ``deferral,'' ``renewal,'' and ``rewrite.''
    This modification of the Uniform Policy states that institutions 
should adopt standards that prohibit additional advances that finance 
the unpaid interest and fees. The Agencies have added guidance that 
comprehensive and effective risk management, reporting, and internal 
controls be established and maintained to support the collection 
process and to ensure timely recognition of losses.
    3. Examination considerations. The Agencies have added guidance 
that an examiner may classify retail portfolios, or segments thereof, 
where underwriting standards are weak and present unreasonable credit 
risk and may criticize account management practices that are deficient.
    Adoption of the Uniform Policy may affect an institution's timing 
and measurement of probable loan losses that have been incurred. As a 
result of changes the Uniform Policy made to the 1980 policy, an 
institution may need to adjust its loan loss allowance to reflect any 
shortening in its time frame for recording charge-offs. Moreover, a 
larger allowance may be necessary if an institution's charge-off 
practices are different than the new guidelines for accounts of 
deceased persons and accounts of borrowers in bankruptcy.
    4. Treatment of specific categories of retail loans. These 
modifications to the Uniform Policy clarified the Policy's treatment of 
various categories of retail loans:
     Regarding retail loans that are due to be charged off, in 
lieu of charging off the entire loan balance, loans with non-real 
estate collateral may be written down to the value of the collateral, 
less cost to sell, if repossession of collateral is assured and in 
process.
     For open- and closed-end loans secured by one-to four-
family residential real estate, a current assessment of value should be 
made no later than 180 days past due, and any outstanding loan balance 
in excess of the value of the property, less cost to sell, should be 
charged off. The Agencies removed the condition in the Uniform Policy 
that such assessment would be required when a residential or home 
equity loan is 120 days past due.
     Loans in bankruptcy with collateral may be written down to 
the value of the collateral, less cost to sell.
    As modified, the Uniform Policy now reads as follows:

Uniform Retail Credit Classification and Account Management Policy 
\1\
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    \1\ The agencies' classifications used for retail credit are 
Substandard, Doubtful, and Loss. These are defined as follows: 
Substandard: An asset classified Substandard is protected 
inadequately by the current net worth and paying capacity of the 
obligor, or by the collateral pledged, if any. Assets so classified 
must have a well-defined weakness or weaknesses that jeopardize the 
liquidation of the debt. They are characterized by the distinct 
possibility that the institution will sustain some loss if the 
deficiencies are not corrected. Doubtful: An asset classified 
Doubtful has all the weaknesses inherent in one classified 
Substandard with the added characteristic that the weaknesses make 
collection or liquidation in full, on the basis of currently 
existing facts, conditions, and values, highly questionable and 
improbable. Loss: An asset, or portion thereof, classified Loss is 
considered uncollectible, and of such little value that its 
continuance on the books is not warranted. This classification does 
not mean that the asset has absolutely no recovery or salvage value; 
rather, it is not practical or desirable to defer writing off an 
essentially worthless asset (or portion thereof), even though 
partial recovery may occur in the future.
    Although the Board of Governors of the Federal Reserve System, 
Federal Deposit Insurance Corporation, Office of the Comptroller of 
the Currency, and Office of Thrift Supervision do not require 
institutions to adopt identical classification definitions, 
institutions should classify their assets using a system that can be 
easily reconciled with the regulatory classification system.
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    The Uniform Retail Credit Classification and Account Management 
Policy establishes standards for the classification and treatment of 
retail credit in financial institutions. Retail credit consists of 
open- and closed-end credit extended to individuals for household, 
family, and other personal expenditures, and includes consumer loans 
and credit cards. For purposes of this policy, retail credit also 
includes loans to individuals secured by their personal residence, 
including first mortgage, home equity, and home improvement loans. 
Because a retail credit portfolio generally consists of a large number 
of relatively small-balance loans, evaluating the quality of the retail 
credit portfolio on a loan-by-loan basis is inefficient and burdensome 
for the institution being examined and for examiners.
    Actual credit losses on individual retail credits should be 
recorded when the institution becomes aware of the loss, but in no case 
should the charge-off exceed the time frames stated in this policy. 
This policy does not preclude an institution from adopting a more 
conservative internal policy. Based on collection experience, when a 
portfolio's history reflects high losses and low recoveries, more 
conservative standards are appropriate and necessary.
    The quality of retail credit is best indicated by the repayment 
performance of individual borrowers. Therefore, in general, retail 
credit should be classified based on the following criteria:
     Open- and closed-end retail loans past due 90 cumulative 
days from the contractual due date should be classified Substandard.
     Closed-end retail loans that become past due 120 
cumulative days and open-end retail loans that become past due 180 
cumulative days from the contractual due date should be classified Loss 
and charged off.\2\ In lieu of charging off the entire loan balance, 
loans with non-real estate collateral may be written down to the value 
of the collateral, less cost to sell, if repossession of collateral is 
assured and in process.
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    \2\ For operational purposes, whenever a charge-off is necessary 
under this policy, it should be taken no later than the end of the 
month in which the applicable time period elapses. Any full payment 
received after the 120- or 180-day charge-off threshold, but before 
month-end charge-off, may be considered in determining whether the 
charge-off remains appropriate.
    OTS regulation 12 CFR 560.160(b) allows savings institutions to 
establish adequate (specific) valuation allowances for assets 
classified Loss in lieu of charge-offs.
    Open-end retail accounts that are placed on a fixed repayment 
schedule should follow the charge-off time frame for closed-end 
loans.
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     One- to four-family residential real estate loans and home 
equity loans that are past due 90 days or more with loan-to-value 
ratios greater than 60 percent should be classified Substandard. 
Properly secured residential real estate loans with loan-to-value 
ratios equal to or less than 60 percent are generally not classified 
based solely on delinquency status. Home equity loans to the same 
borrower at the same institution as the senior mortgage loan with a 
combined loan-to-value ratio equal to or less than 60 percent need not 
be classified. However, home equity loans where the institution does 
not hold the senior mortgage, that are past due 90 days or more should 
be classified Substandard, even if the loan-to-value ratio is equal to, 
or less than, 60 percent.
    For open- and closed-end loans secured by residential real estate, 
a current assessment of value should be made no later than 180 days 
past due. Any outstanding loan balance in excess of the value of the 
property, less cost to sell, should be classified Loss and charged off.
     Loans in bankruptcy should be classified Loss and charged 
off within

[[Page 36905]]

60 days of receipt of notification of filing from the bankruptcy court 
or within the time frames specified in this classification policy, 
whichever is shorter, unless the institution can clearly demonstrate 
and document that repayment is likely to occur. Loans with collateral 
may be written down to the value of the collateral, less cost to sell. 
Any loan balance not charged off should be classified Substandard until 
the borrower re-establishes the ability and willingness to repay for a 
period of at least six months.
     Fraudulent loans should be classified Loss and charged off 
no later than 90 days of discovery or within the time frames adopted in 
this classification policy, whichever is shorter.
     Loans of deceased persons should be classified Loss and 
charged off when the loss is determined or within the time frames 
adopted in this classification policy, whichever is shorter.

Other Considerations for Classification

    If an institution can clearly document that a past due loan is well 
secured and in the process of collection, such that collection will 
occur regardless of delinquency status, then the loan need not be 
classified. A well-secured loan is collateralized by a perfected 
security interest in, or pledges of, real or personal property, 
including securities with an estimable value, less cost to sell, 
sufficient to recover the recorded investment in the loan, as well as a 
reasonable return on that amount. In the process of collection means 
that either a collection effort or legal action is proceeding and is 
reasonably expected to result in recovery of the loan balance or its 
restoration to a current status, generally within the next 90 days.

Partial Payments on Open-and Closed-End Credit

    Institutions should use one of two methods to recognize partial 
payments. A payment equivalent to 90 percent or more of the contractual 
payment may be considered a full payment in computing past due status. 
Alternatively, the institution may aggregate payments and give credit 
for any partial payment received. For example, if a regular installment 
payment is $300 and the borrower makes payments of only $150 per month 
for a six-month period, the loan would be $900 ($150 shortage times six 
payments), or three full months past due. An institution may use either 
or both methods in its portfolio, but may not use both methods 
simultaneously with a single loan.

Re-Aging, Extensions, Deferrals, Renewals, and Rewrites \3\
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    \3\ These terms are defined as follows. Reage: Returning a 
delinquent, open-end account to current status without collecting 
the total amount of principal, interest, and fees that are 
contractually due. Extension: Extending monthly payments on a 
closed-end loan and rolling back the maturity by the number of 
months extended. The account is shown current upon granting the 
extension. If extension fees are assessed, they should be collected 
at the time of the extension and not added to the balance of the 
loan. Deferral: Deferring a contractually due payment on a closed-
end loan without affecting the other terms, including maturity, of 
the loan. The account is shown current upon granting the deferral. 
Renewal: Underwriting a matured, closed-end loan generally at its 
outstanding principal amount and on similar terms. Rewrite: 
Underwriting an existing loan by significantly changing its terms, 
including payment amounts, interest rates, amortization schedules, 
or its final maturity.
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    Re-aging of open-end accounts, and extensions, deferrals, renewals, 
and rewrites of closed-end loans can be used to help borrowers overcome 
temporary financial difficulties, such as loss of job, medical 
emergency, or change in family circumstances like loss of a family 
member. A permissive policy on re-agings, extensions, deferrals, 
renewals, or rewrites can cloud the true performance and delinquency 
status of the portfolio. However, prudent use is acceptable when it is 
based on a renewed willingness and ability to repay the loan, and when 
it is structured and controlled in accordance with sound internal 
policies.
    Management should ensure that comprehensive and effective risk 
management and internal controls are established and maintained so that 
re-ages, extensions, deferrals, renewals, and rewrites can be 
adequately controlled and monitored by management and verified by 
examiners. The decision to re-age, extend, defer, renew, or rewrite a 
loan, like any other modification of contractual terms, should be 
supported in the institution's management information systems. Adequate 
management information systems usually identify and document any loan 
that is re-aged, extended, deferred, renewed, or rewritten, including 
the number of times such action has been taken. Documentation normally 
shows that the institution's personnel communicated with the borrower, 
the borrower agreed to pay the loan in full, and the borrower has the 
ability to repay the loan. To be effective, management information 
systems should also monitor and track the volume and performance of 
loans that have been re-aged, extended, deferred, renewed, or rewritten 
and/or placed in a workout program.

Open-End Accounts

    Institutions that re-age open-end accounts should establish a 
reasonable written policy and adhere to it. To be considered for re-
aging, an account should exhibit the following:
     The borrower has demonstrated a renewed willingness and 
ability to repay the loan.
     The account has existed for at least nine months.
     The borrower has made at least three consecutive minimum 
monthly payments or the equivalent cumulative amount. Funds may not be 
advanced by the institution for this purpose.
    Open-end accounts should not be re-aged more than once within any 
twelve-month period and no more than twice within any five-year period. 
Institutions may adopt a more conservative re-aging standard; for 
example, some institutions allow only one re-aging in the lifetime of 
an open-end account. Additionally, an over-limit account may be re-aged 
at its outstanding balance (including the over-limit balance, interest, 
and fees), provided that no new credit is extended to the borrower 
until the balance falls below the predelinquency credit limit.
    Institutions may re-age an account after it enters a workout 
program, including internal and third-party debt counseling services, 
but only after receipt of at least three consecutive minimum monthly 
payments or the equivalent cumulative amount, as agreed upon under the 
workout or debt management program. Re-aging for workout purposes is 
limited to once in a five-year period and is in addition to the once in 
twelve-months/twice in five-year limitation described above. To be 
effective, management information systems should track the principal 
reductions and charge-off history of loans in workout programs by type 
of program.

Closed-End Loans

    Institutions should adopt and adhere to explicit standards that 
control the use of extensions, deferrals, renewals, and rewrites of 
closed-end loans. The standards should exhibit the following:
     The borrower should show a renewed willingness and ability 
to repay the loan.
     The standards should limit the number and frequency of 
extensions, deferrals, renewals, and rewrites.
     Additional advances to finance unpaid interest and fees 
should be prohibited.
    Management should ensure that comprehensive and effective risk 
management, reporting, and internal controls are established and 
maintained

[[Page 36906]]

to support the collection process and to ensure timely recognition of 
losses. To be effective, management information systems should track 
the subsequent principal reductions and charge-off history of loans 
that have been granted an extension, deferral, renewal, or rewrite.

Examination Considerations

    Examiners should ensure that institutions adhere to this policy. 
Nevertheless, there may be instances that warrant exceptions to the 
general classification policy. Loans need not be classified if the 
institution can document clearly that repayment will occur irrespective 
of delinquency status. Examples might include loans well secured by 
marketable collateral and in the process of collection, loans for which 
claims are filed against solvent estates, and loans supported by valid 
insurance claims.
    The Uniform Classification and Account Management policy does not 
preclude examiners from classifying individual retail credit loans that 
exhibit signs of credit weakness regardless of delinquency status. 
Similarly, an examiner may also classify retail portfolios, or segments 
thereof, where underwriting standards are weak and present unreasonable 
credit risk, and may criticize account management practices that are 
deficient.
    In addition to reviewing loan classifications, the examiner should 
ensure that the institution's allowance for loan and lease losses 
provides adequate coverage for probable losses inherent in the 
portfolio. Sound risk and account management systems, including a 
prudent retail credit lending policy, measures to ensure and monitor 
adherence to stated policy, and detailed operating procedures, should 
also be implemented. Internal controls should be in place to ensure 
that the policy is followed. Institutions that lack sound policies or 
fail to implement or effectively adhere to established policies will be 
subject to criticism.

Implementation

    This policy should be fully implemented for reporting in the 
December 31, 2000 Call Report or Thrift Financial Report, as 
appropriate.


    Dated: June 6, 2000.
Keith J. Todd,
Executive Secretary, Federal Financial Institutions Examination 
Council.
[FR Doc. 00-14704 Filed 6-9-00; 8:45 am]
BILLING CODE 6210-01-P (25%) 6714-01-P (25%) 6720-01-P (25%) 4810-33-P 
(25%)