TRM Uniform Retail Credit Classification Policy

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					Department of the Treasury
Office of Thrift             Supervision

                                                September 24,1997                                      Number:       178

This rescission does not change the applicability of the conveyed document. To determine the
applicability of the conveyed document, refer to the original issuer of the document.
In the attached notice and request for comment,             historical experience with collecting   similar loans,
the Federal Financial Institutions Examination              and classify the loans accordingly.
Council (FFIEC) requests comment on its planned
                                                            7: _                            While OTS expects
revisions to the Uniform Retail Credit Classification
                                                            institutions to follow their own prudent policies,
Policy. This policy statement was originally issued
                                                            generally, past due loans should only be re-aged
in 1980 and is still in effect.
                                                            when the borrower has demonstrated a renewed
 The FFIEC requests comment on a series of ques-            willingness and ability to repay the loan.
tions concerning    retail credit, including a clas-
                                                            Partial Paympnts: OTS for several years has al-
sification policy for open-end and closed-end
                                                            lowed institutions to count any amounts remitted
credit, residential and home equity loans, loans af-
                                                            toward past due payments in the calculation of a
fected by bankruptcy, fraudulent activity and/or
death of a borrower, re-aging of accounts, and              loan’s total delinquency, even if the payment was
partial payments.                                           less than 90 percent. Until the revised interagency
                                                            policy is rz.ued, thrift institutions may continue to
 The notice and request for comments highlights             give borrowers pro-rata credit for partial payments
several areas where no definitive interagency pol-          that are less than 90 percent, consistent with the
icy currently exists. This raises a question as to          example used in the request for comment.
what standards thrifts should use to classify their
retail credits. Until a revised policy is issued, thrifts   The notice and request for comment was pub-
should use their own prudent classification pol-            lished in the September 12, 1997, edition of the
icies, following OTS’ classification guidelines and         Federal Register, Vol. 62, No. 177, pp. 48089.
definitions in Thrift Activities Handbook Section           48092. Comments should be sent to Joe M. Cleav-
260.                                                        er, Executive Secretary, FFIEC, 2100 Pennsylvania
                                                            Avenue N.W., Suite 200, Washington D. C. 20037.
Thrifts also should use the following guidance:             Comments are requested by November 12, 1997.
Loans Where a Loss 1s L&&: Institutions should              For further information contact:
classify such loans in conformance with OTS pol-            William J. Magrini           202/906-5744
icy and record the loss in accordance with gener-           Semor Project Manager,
ally accepted accounting principles. For example,           OTS Supervision Policy
with respect to loans where the borrower is de-
ceased or files for bankruptcy protection, thrifts          Vem McKinley                  202/906-6241
should determine the likelihood of repayment,               Attorney.
based on the facts of the case and the institution’s        OTS Chief Counsel’s Office

                                                            Executive D&tor,
Federal Register   Attachment to Transmittal 178
             Federal   Register   1 Vol. 62, No.   177 I Friday.   September   12. 1997 ! Notices                49099

                                                                               !ZDERAL FINANCIAL lNSllTUllONS
                                                                               EXAMINATION COUNCIL

                                                                               Unlfoml Retail credit Clasalflcatlon
                                                                               AoENtX Federal Financial lnstth~tiona
                                                                               Examination Council.
                                                                               ACtlOM:Notice and reauest for comment.
                                                                               s”YMAIW     The Board of Govemon of the
                                                                               Federal Reserve System (FRB). the
                                                                               Federal Deposit lnsurence Corporation
                                                                               (FDICI. tbe office of the comptmller of
                                                                               the Currency (OCC). end the Office of
                                                                               Thrift Supervision (OTS) (collectively
                                                                               referred to es the agencies), under the
                                                                               auspicea of the Fed& Finandel
                                                                               Inetitutions Exnmtnetion ColJnctl
                                                                               IFnEc). are requesting comment on
                                                                               changes to the 1960 Uniform Policy for
                                                                               Clessi5cetion 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 besis.
                                                                                  The FTIEC is currently reviewing tbe
                                                                               1980 policy to determine where
                                                                               revisions may be necessary to more
                                                                               sccuratsly reflect the chenging nature of
                                                                               risk in today’s retail credit envimmnent.
                                                                               The preltt         results of tbis review
                                                                               indicate that revtaicms should include: a
                                                                               cberge-off policy for &n-end and
                                                                               closed-end aedit: e cksrificetion policy
                                                                               for loans effected by bankruptcy.
                                                                               freudulent activtty. and/or death of e
                                                                               bormwer. e prudent reaping policy for
                                                                               peat due ecccnm~ and a classification
                                                                               policy for delinquent residential
                                                                               mortgage end home equity loans.
                                                                                  Before developing e revised policy
                                                                               statement foi public comment. the
                                                                               FFJEC is tirst solidting comment8 on:
                                                                               rune8 in the existing policy statement
                                                                               thet msy need to be revised: specific
                                                                               recommendations for changing the
                                                                               policy statement: date that would help
                                                                               quantify the financial or business
                                                                               impact on financial institutions if the
                                                                               existing policy wee revised: and en
                                                                               estimate oftbe time fremes necessary for
48090               Federal   Register   I Vol. 62. No. 177 I Friday,      September      12. 1997   I Notices

an in.stitutio” to succassfully inlplemeni   due status, the 1980 policy also                (l)(a) Should a uniform time frame be
the revisions. Aher reviewing the input      permitted exceptions to the                  used to charge-off both open-end end
received. the FFl??Zwill issue e revised     classification policy in situations where    closed-end eccounts?
policy stetement for public comment          significant amounts were involved or            Mb1 If so, what should that time
that estebliabes clear guidance for the      when e loan wes well secured end in          frame be?
industry: is based on an informed end        the process of collection.                      f~llcl If e uniform time frame for both
reasonable analysis of all available data:      A fundamental objective of the 1980       types of credit is not considered
and satisfies the principles of sound end    policy Is the timely recognition of losses   appropriate. what time fxemes ere
effective super&ion.                         es required by generally accepted            reasonable for charging off open-end
DATE%    Comments must be received by        accounting principles (CAAPJ. While          credit end closed-end credit? Please
November 12.1997.                                                                         ex lain.
                                             the 1960 policy provides general                 l)(d) If there was a change in tbe time
                                             guidance for a large segment of the retail      P
                                                                                          frames for charging-off delinquent
Joe hf. Cleever.Executive Secretary.         credit pmtfcdlo. it does not provide
                                                                                          eccounts, whetis e ressonable time
Federel Financial lnstitutionr               supervisory guidance on loen cbexga
                                                                                          frame to allow institutions to comply
Rxeminetion councu. 2100                     offs related to censumer benkruptcy.
                                                                                          with such a chmge?
Pennsylvania Avenue NW, Suite 200.           fraudulent activities. and accounts of          (l)(e) Should Ibe currsnt regulatory
Weshingmn. DC 20037 or by faceimlle          decedents. Furthermore. no guidance is       prectice be continued of classifying
mnemiealon to (202) 634-SSS8.                pmvided on the cle~siffcation of             open-end end closed-end credit
                                             delinquent resldentlel mortgages and         Substendard when the eccmmt is 90
                                             home equity loans. in light of the           days or mere delinquent? If not. what
  FRB: wi11iern coen. supslvlsory            questionable esset quality of many of
Financial Anelysl. (202) 452-5219.                                                        alternetive would you suggest? Pleese
                                             these eccounts end the inconsistent wey      explain the benefits of e suggested
Division of Banking Supervision and          in which financial institutions report                                     __
Reguletion. Board of Governors otlhe
                                             end charge& these eccounts. the FFIEX           [l)(fJ Should e stenderd for the
Federal Reserve System. For the hearing      believes that additional supervisory         Doubtful clessifrcetion be adopted and.
impeirsd only. Telecommerdcation             yidence is necessery.                        if so, whet should be the standard and
Device for the Deaf ITDDJ. Dorotbea
                                             Request for Crmunents in the Following       why?
Thompson, (202) 452-3544, Board of                                                           (l)(g) Currently. no requirement exists
Governors of the Fedeml Reserve              Anu
                                                                                          to place retail credit loans on
System, 20th end C Streets NW.               (1)   for Open-End   and      nonaccrue status. Should nuidence for
Washington. DC 20551.                        Closed-End Credit                            placing loans one nonecc&l stetus be
  FDK: James Leitner. Bxambmtion
                                                The agencies recognize the                adopted and. if so. et how meny days
Specielist. (202) 0986790. Division of                                                    delinquent should open-end credit end
Supervlsioa For legal issues. Micheel        inconsistency between the level of risk
                                             essociated with openad       end closed-     closed-end credit be placed one
Phillips. Counsel. 1202) 890-3581.
                                             end credit end Ihe policy for cherging-      nonaccmal stetus?
Supervision end L+letion      Branch.                                                        (l)(h) An alternative toe requirement
Federal Deposit Inswence Corporation.        off delinquent eccounts. Under the 1980
                                                                                          that eccouts be cherged-off after e
550 17th Street NW, Washington. DC           policy. open-end credit. which ls
                                                                                          designated delinquency is tbe creation
20429.                                       generally unsecured. should be chuged.
                                                                                          of 811  allocated or specific reserve.
  OCC: Cethy Young. National Benk            off when an eccount is 130 days
                                                                                          Should the FFISC require an allocated
Examiner. Credit R&k Division, (202)         delinquent. Conversely. closed-end
                                                                                          or specific reserve. and if so, when
0X-4474: Ron Shlmebukum. Senior              credit. which is normally secured by
                                                                                          should it be established? Please discuss
Attorney, Legislative end Reguletory         soxne type of collsterel. is subject toe
                                                                                          La edventeges end disedventeges of
Activities Division, Office of the           more stringent policy of 120 days
                                                                                          such e proposal.
comptroller of the currency (202) 874-       delinquent before e loan is charged off.
5090.250 E Street SW. Washington. DC         Over the years this inconsistency bes        (2) Bonkmptcy, Fmud, and JJeceused
20219.                                       become more apparent es the market for       Accounts
  OTS: William J. Megrfni. Senior            open-end credit evolved.                       No FFlEC guidance exists for
Project Manager. [2021906-5744.                 In lOSO. open-end credit generally        benkmptcy. fraud. end deceased
Supervision Policy: Vern McKinley.           consisted of credit cerd eccounts with       accounts. Tbe FFISC believes guidance
Attorney. (202) 900-0241. Regulationr        smell credit lines that limited the          on these eccounts is needed to ensure
end Legislation Division. chief              exposure en institution had to en            recognition of loss among regulated
cknmsel’s office, OffICEof Thrfft            individual bmmwer. In today’s                institutions is timely end consistent
Supervision. 1700 G Street NW,               envimnment. open-end credit generelly        Comment is requested on the need to
Wesbington. DC 20552.                        includes eccounts with much larger           provide such guidance end on the
            IwFowlloNz                       lines of credit end higher risk levels.
                                             The change in the nature of these            ~~~&jzx;~;~~&
Beckground Infermetien                       accounts. combined with the variety of
   On June 30.19eO. the FRB. FDIC. and       charge-off practices examiners recenUy       account should be charged-off for
OCC adopted the FFIEC uniform policy         encountered. reised the concern of the       Chapter 7 bankruptcies end Chapter 13
for classification of open-end and           agencies. To address this concern. the       benknmtciss? If so. what should thet
closed-end credit. The OTS adopted tbe       FFIFC is seeking public comment on           guide&e be?
policy in 1987. The policy was issued        whether e charge-off policy that is more       (z)(b) What event in the bankruptcy
to establish uniform guidelines for the      consistent with the risk associated with     process should trigger loss recognition:
classification of instelment credit based    open-end and closed-er,d accounts            tbe Sling date. the date of notificat
on delinquency status. While tbe 1980        should be adopted end if so, what that       to tbe creditor by the bankruptcy court
policy recognized the statistical validity   policy should be. Specifically. the          that a borrower has filed for bankruotcv.
of measuring losses predicated on past       FFJEC requests comment on:                   the date that the bankruptcy trustee*
49092   Federal   Register   I Vol. 62, No. 177 I Friday.   September   12, 1997 I Notices