Proposed Interagency Uniform Retail Credit Classification Policy by alicejenny



                     Office of Thrift Supervision                                                        Ellen Seidman
                     Department of the Treasury                                                                  Director

                     1700 G Street, N.W., Washington, DC 20552 • (202) 906-6590

                                                                                  July 24, 1998
    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.
MEMORANDUM FOR:                         Chief Executive Officers

FROM:                                   Ellen Seidman

SUBJECT:                                Proposed Interagency Uniform Retail Credit Classification

On July 6, 1998, the Federal Financial Institutions Examination Council (FFIEC) proposed to revise its
1980 policy statement for the classification of retail credit by publishing the attached “Uniform Retail
Credit Classification Policy” in the Federal Register (Vol. 63, No. 128). The original retail credit
classification policy statement was adopted by the federal banking regulatory agencies in 1980, except
for the Office of Thrift Supervision, which adopted the policy in 1987 (12 C.F.R. 561.13 and 561.47).
The revisions are part of an interagency effort to bring joint policies and regulations up to date. The
agencies that participated in the revision include the Office of the Comptroller of the Currency, the
Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift
Supervision (agencies).

FFIEC seeks comment on all aspects of the proposal. Most notably, commenters are asked to choose
between two alternatives: (1) establish a uniform time frame for charging off both open-end and
closed-end credits when they become 150 days contractually past due; or (2) leave the time frames
substantially unchanged (at 120 days cumulative delinquency for closed-end credit and 180 days for
open-end credit). If the first option is adopted, institutions with closed-end loans would have 30 more
days than the current 120 days to collect the loans before having to charge them off. Institutions with
credit cards and other open-end credits would receive 30 fewer days than the current 180 days to
collect the loans before having to charge them off.

Under both options, open-end and closed-end credits that become 90 days or more contractually
delinquent would be classified “Substandard.” If an institution could clearly document that a loan was
well secured and in the process of collection, however, the loan would not have to be classified.

The agencies are also proposing the following new guidelines:

•     Unsecured loans to borrowers who declare bankruptcy should generally be charged off by the end
      of the month in which the creditor receives notification of filing from the bankruptcy court.
Chief Executive Officers
page 2

   •   Secured and partially secured loans to borrowers who declare bankruptcy should be evaluated for
       repayment potential. Any loss should be charged off within 30 days of notification of filing from
       the bankruptcy court, or within the charge-off time frames adopted in the classification policy,
       whichever is shorter.
   •   Fraudulent loans should be charged off within 90 days of discovery.
   •   In cases where the borrower dies, loans should generally be charged off when the loss becomes
   •   One-to-four family residential real estate loans and home equity loans that are delinquent 90 days
       or more, and with loan-to-value ratios greater than 60 percent, should be classified “Substandard.”

   The proposed implementation date for the revised policy statement is January 1, 1999. However, if
   the charge-off time frames are changed to 150 days, the proposed implementation date for that
   particular change is January 1, 2001. The proposed effective date for the other provisions would
   remain January 1, 1999.

   The proposal raises issues that are extremely important for savings associations, so I encourage you to
   submit comments and any data to support your position. Comments are due by September 4, 1998
   and should be forwarded to Keith J. Todd, Acting Executive Secretary, Federal Financial Institutions
   Examinations Council, 2100 Pennsylvania Avenue NW, Washington, DC 20037, or sent by facsimile
   transmission to (202) 634-6556. Please contact your OTS regional office if you have any questions.

                          Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices                             36403

FEDERAL FINANCIAL INSTITUTIONS               Examination Council, 2100                    institutions, has prompted the federal
EXAMINATION COUNCIL                          Pennsylvania Avenue NW., Suite 200,          regulatory agencies to propose several
                                             Washington, DC 20037, or by facsimile        revisions to the 1980 policy.
Uniform Retail Credit Classification         transmission to (202) 634–6556.
Policy                                                                                    Comments Received
                                             FOR FURTHER INFORMATION CONTACT:
AGENCY: Federal Financial Institutions          FRB: William Coen, Supervisory              The FFIEC requested comment on
Examination Council.                         Financial Analyst, (202) 452–5219,           September 12, 1997 at 62 FR 48089
                                             Division of Banking Supervision and          (September Notice) on a series of
ACTION: Notice and request for comment.
                                             Regulation, Board of Governors of the        questions designed to help the FFIEC
SUMMARY: The Federal Financial               Federal Reserve System. For the hearing      develop a revised classification policy.
Institutions Examination Council             impaired only, Telecommunication             A total of 61 comments were received
(FFIEC), on behalf of the Board of           Device for the Deaf (TDD), Dorothea          representing the views of 22 banks and
Governors of the Federal Reserve             Thompson, (202) 452-3544, Board of           thrifts, nine bank holding companies,
System (FRB), the Federal Deposit            Governors of the Federal Reserve             eight regulatory agencies, seven trade
Insurance Corporation (FDIC), the Office     System, 20th and C Streets NW.,              groups, and 15 other companies and
of the Comptroller of the Currency           Washington, DC 20551.                        individuals. The following is a summary
(OCC), and the Office of Thrift                 FDIC: James Leitner, Examination          of the questions and responses.
Supervision (OTS), collectively referred     Specialist, (202) 898–6790, Division of      1. Charge-off Policy for Open-End and
to as the Agencies, requests comment on      Supervision. For legal issues, Michael       Closed-End Credit
proposed changes to the Uniform Policy       Phillips, Counsel, (202) 898–3581,
for Classification of Consumer               Supervision and Legislation Branch,             The September Notice requested
Installment Credit Based on                  Federal Deposit Insurance Corporation,       comment on whether a uniform time
Delinquency Status (Uniform Retail           550 17th Street NW., Washington, DC          frame should be used to charge off both
Credit Classification Policy). The           20429.                                       open-end and closed-end accounts, and
National Credit Union Administration            OCC: Cathy Young, National Bank           if a change in policy is made, a
(NCUA), also a member of FFIEC, is           Examiner, Credit Risk Division, (202)        reasonable time frame to allow
reviewing the applicability and              874–4474, or Ron Shimabukuro, Senior         institutions to comply with such a
appropriateness of the FFIEC proposal        Attorney, Legislative and Regulatory         change. Comments were also sought on
for institutions supervised by the           Activities Division (202) 874–5090,          whether to continue the current
NCUA; however, the NCUA does not             Office of the Comptroller of the             regulatory practice of classifying open-
plan to adopt the proposed policy at this    Currency, 250 E Street SW.,                  end and closed-end credit Substandard
time.                                        Washington, DC 20219.                        when the account is 90 days or more
  The Uniform Retail Credit                     OTS: William J. Magrini, Senior           delinquent; whether a standard for the
Classification Policy is a supervisory       Project Manager, (202) 906–5744,             Doubtful classification or guidance for
policy used by the federal regulatory        Supervision Policy; or Vern McKinley,        placing loans on a nonaccrual status
agencies for the uniform classification of   Attorney, (202) 906–6241, Regulations        should be adopted; and whether a
retail credit loans of financial             and Legislation Division, Chief              specific reserve account should be
institutions. At the time the initial        Counsel’s Office, Office of Thrift           established.
Uniform Retail Credit Classification         Supervision, 1700 G Street NW,                  Charge off policy: Commenters were
Policy was issued in 1980, open-end          Washington, DC 20552.                        divided on whether to maintain the
credit generally consisted of credit card    SUPPLEMENTARY INFORMATION:                   current policy of charging off open-end
accounts with small credit lines to the                                                   (credit card) loans at 180 days
most creditworthy borrowers. Today,          Background Information                       delinquent and closed-end installment
open-end credit generally includes             On June 30, 1980, the FRB, FDIC, and       loans at 120 days or to change the policy
accounts with much larger lines of           OCC adopted the FFIEC uniform policy         to a uniform time frame for both types
credit to diverse borrowers with a           for classification of open-end and           of loans. Almost half of the commenters
variety of risk levels. The change in the    closed-end credit (1980 policy). The         suggested a uniform charge-off time
nature of those accounts and the             Federal Home Loan Bank Board, the            frame for both types of loans.
inconsistencies in the reporting and         predecessor of the OTS, adopted the          Recommendations for the charge-off
charging off of accounts has raised          1980 policy in 1987. The 1980 policy         time frame varied from 90 days to 180
concerns with the FFIEC. This proposed       established uniform guidelines for the       days; the majority who favored
policy statement is intended to help the     classification of installment credit based   uniformity believed the time frame
FFIEC develop a revised classification       on delinquency status and provided           should be less than 180 days. Of 51
policy to more accurately reflect the        different charge-off time frames for         comments to this question, 22
changing nature of risk in today’s retail    open-end and closed-end credit. The          commenters preferred a stricter open-
credit environment. The FFIEC is             1980 policy recognized the statistical       end standard than what is contained in
proposing to revise the charge-off policy    validity of determining losses based on      the 1980 policy and remaining
for closed-end and open-end credit and       past due status. At that time, open-end      respondents supported no change or a
address other significant issues in retail   credit generally consisted of credit card    less strict open-end standard.
credit lending by the financial services     accounts with small credit lines to the         Commenters in favor of a uniform
industry. The FFIEC is requesting            most creditworthy borrowers. Today,          time frame cited three main reasons: (1)
comment on the proposed revision and         open-end credit generally includes           inconsistency in the 1980 policy
the listed issues.                           accounts with much larger lines of           guidelines; (2) recovery data supports a
DATES: Comments must be received by          credit to diverse borrowers with a           lengthening of the charge-off policy for
September 4, 1998.                           variety of credit risk levels. The change    closed-end installment loans; and (3)
ADDRESSES: Comments should be sent to        in the nature of those accounts and the      the level of credit risk in open-end and
Keith Todd, Acting Executive Secretary,      inconsistencies in the reporting and         closed-end loans has changed since the
Federal Financial Institutions               charging off of accounts by financial        1980 policy was adopted.
36404                     Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

   Commenters supporting a uniform           not practical or desirable to defer          reported to the credit bureau, further
time frame cited the inconsistency           writing off an essentially worthless asset   damaging the customer’s credit rating
between the level of risk associated with    even though partial recovery may occur       and future ability to obtain credit.
credit card loans and closed-end credit      in the future. A high rate of recoveries     Commenters stated that the customer
and the inconsistency in the 1980 policy     may illustrate a conservative charge-off     loses the incentive to pay, further
for charging-off delinquent accounts.        policy, whereas a low rate may indicate      impacting an institution’s recoveries.
Under the 1980 policy, credit card           an unwarranted delay in the recognition         Given the division in comments as to
loans, which generally are unsecured,        of losses. Since 1985, recoveries for        the appropriate charge-off policy
are charged off when an account is 180       credit card loans have averaged 19           guidelines, the FFIEC is requesting
days delinquent. Conversely, closed-end      percent, while recoveries for installment    comment on two alternative charge-off
credits generally amortize according to      loans have averaged 34 percent.              standards (only one of these will be
a payment schedule, are better protected        Commenters opposed to any change          implemented):
via a security interest in collateral, and   of the charge-off standards cited four          • A uniform charge-off time frame for
experience much higher recovery rates        principal reasons: (1) the impact on the     both open-end and closed-end credit at
after being charged off, but are subject     industry’s earnings and capital; (2) the     150 days delinquency with a proposed
to a more stringent charge-off policy at     effect on credit card securitization         implementation date of January 1, 2001;
120 days delinquency. Over the years,        transactions; (3) the limitation of          or
the inconsistency in the time frames has     programming resources because of Year           • Retaining the existing policy of
become more apparent as the market for       2000 issues; and (4) impact on               charging off delinquent closed-end
credit cards evolved. Several                consumers.                                   loans at 120 days and delinquent open-
commenters stated that the risk                 Some commenters believed that             end loans at 180 days. If this option is
associated with open-end credit has          changing the charge-off guidelines for       selected, any changes affected by the
increased significantly since 1980. This     open-end credit may make it more             final policy statement would have a
is due to competition in solicitations,      difficult for lenders to collect from        January 1, 1999 implementation date.
less stringent underwriting criteria,        borrowers. They stated that a change in         Substandard classification policy:
lower minimum payment requirements,          the guidelines will result in more           Thirty-six of 41 commenters supported
lack of a security interest, and lower       expense for institutions, because of the     the practice of classifying open-end and
recovery rates after charge-off.             need to revise their existing collection     closed-end loans Substandard at 90 days
Commenters contended that these              policies and procedures. This can            delinquency. The majority of
factors provide support for shortening       negatively affect an institution’s           commenters opposed a uniform policy
the current 180 day charge-off time          earnings and capital.                        of classifying loans Doubtful, placing
frame for open-end credit.                      Others stated that a change in the        them on nonaccrual, or setting up
   A uniform time frame would                charge-off time frames would affect          separate reserves in lieu of charging off
eliminate the inconsistent treatment for     credit card securitization transactions.     a loan. The FFIEC has long felt that
closed-end and open-end credit. On a         One commenter mentioned that as of           when an account is 90 days past due, it
volume basis, the change would actually      September 1997, $213 billion, or 40.6        displays weaknesses warranting
lengthen the charge-off time frame for       percent of outstanding credit card           classification and proposes to continue
more loans than it would shorten. As of      receivables, were securitized. Some          the policy of classifying open-end and
year end 1997, institutions supervised       commenters believed that any change in       closed-end loans Substandard at 90 days
by the FRB, FDIC, and OCC had closed-        the charge-off policy could trigger          delinquency. The FFIEC has decided
end installment loans of $338 billion        contractual provisions, such as early        not to add guidance for classifying retail
and open-end credit card loans of $237       amortization or collateral substitution      credit Doubtful or placing those loans
billion. At that time, institutions          requirements. This would increase costs      on nonaccrual.
supervised by the OTS had closed-end         to credit card issuers and limit their
                                             ability to sell securitizations, thus        2. Bankruptcy, Fraud, and Deceased
installment loans of $29 billion and
                                             potentially restricting credit card          Accounts
open-end loans totaling $23 billion.
Under a uniform time frame,                  lending. Some commenters indicated              The September Notice requested
institutions would have an additional        that such a change may cause them to         comment on whether there should be
month to work with borrowers before          exit the securitization market for years.    separate guidance for determining: (i)
recognizing a loss for lower risk closed-       Some commenters expressed concern         when an account should be charged off
end credit. Credit card issuers would        about the re-programming efforts             for bankruptcies under Chapter 7 or 13
have this same 150-day charge-off time       needed for a change in the charge-off        of the Federal Bankruptcy Code; (ii) the
frame, although it would be 30 days less     policy. This comes at a time when            event in the bankruptcy process that
than the current requirement.                computer programmer resources are            should trigger loss recognition; (iii) the
   The most direct measure of credit risk    limited due to Year 2000 efforts.            amount of time needed by an institution
is the ratio of net losses to loans. In         Finally, some commenters contended        to charge off an account after the
every year since 1984, the credit card       that requiring earlier charge offs will      bankruptcy event; and (iv) whether, as
loss ratio has been much higher than the     have an impact on consumers. The             an alternative to an immediate charge
closed-end installment loss ratio. During    incentives for borrowers to pay and for      off, it would be beneficial to set up a
the fourteen-year period, the average net    banks to invest in collection efforts are    specific reserve account. Comments also
loss for credit cards was 3.2 percent        greatest before the charge off has           were sought on the amount of time
while the average net loss for               occurred. One industry association           needed by an institution to charge off
installment loans was 0.8 percent. The       reported that 34 percent of accounts that    losses due to fraud or losses on loans to
percentage of current recoveries to prior    are 120 days delinquent will be made         deceased borrowers.
year charge-offs is a ratio that indicates   current before charge off under the 1980        Bankruptcy: The majority of
how timely loans are charged-off. A loss     policy. A shorter charge-off time frame      commenters, 26 of 40, stated that
classification does not mean that the        reduces the borrower’s time to cure a        separate guidance should not be
asset has absolutely no recovery or          debt. Once charge off occurs, the            developed for bankruptcies under
salvage value; rather, it means that it is   customer’s charged-off account is            Chapter 7 or Chapter 13. Many
                          Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices                              36405

commenters stated that charge-off            this would require significant computer     opened for a minimum period of time
guidance recognizing bankruptcies            programming changes. Comments were          before it can be re-aged, and the account
arising from defaults on secured loans       sought on other reasonable alternatives     should not be re-aged more than once
versus bankruptcies arising from             and how payments should be applied.         per year.
defaults on unsecured is more realistic.     Comments also were requested about             The FFIEC concurred with those
The majority indicated that the              the need for guidance on fixed payment      criteria, but decided that additional
notification date to the creditor from the   programs.                                   guidance on the amount that could be
bankruptcy court should constitute the         The commenters were divided evenly        re-aged, and the number of times the
event triggering loss recognition. The       between supporting the proposal versus      account could be re-aged in its lifetime
majority also did not believe it should      keeping the existing policy whereby 90      were also needed. The FFIEC proposes
be necessary to set up a separate            percent of a payment qualifies as a full    to allow re-aging of delinquent loans,
allowance reserve at the time of the         payment. Many commented about the           when it is based on recent, satisfactory
bankruptcy filing.                           significant programming costs that a        performance by the borrowers and when
   The FFIEC proposes to add guidance        change to the existing policy would         it is structured in accordance with the
specifying that unsecured loans for          cause. For that reason, the FFIEC is        institution’s prudent internal policies.
which the borrower declared                  proposing that institutions be permitted    Institutions that re-age open-end
bankruptcy should be charged off by the      to choose one of two methods. The first     accounts or extend, defer, or rewrite
end of the month that the creditor           method retains the current policy of        closed-end accounts should establish a
receives notification of filing from the     considering a payment equivalent to 90      written policy, ensure its
bankruptcy court. In addition, secured       percent or more of the contractual          reasonableness, and adhere to it. An
loans in bankruptcy should be evaluated      payment to be a full payment in             account eligible for re-aging, extension,
for repayment potential and classified       computing delinquency. The second           deferral, or re-write exhibits the
appropriately, within 30 days of             method would allow an institution to        following:
notification of filing from the              aggregate payments and give credit for         • The borrower should show a
bankruptcy court, or within the charge-      any partial payment received; however,      renewed willingness and ability to
off time frames in the classification        the account should be considered            repay the loan.
policy, whichever is shorter.                delinquent until all contractual               • The borrower should make at least
   The FFIEC is aware that Congress is       payments are received. Whichever            three consecutive contractual payments
in the process of addressing bankruptcy      method is chosen, the same method           or the equivalent lump sum payment
reform legislation. If legislation is        should be used consistently within the      (funds may not be advanced by the
passed, the FFIEC will review its            entire portfolio.                           institution for this purpose).
proposed bankruptcy guidelines for any         Most commenters did not advocate             • No more than one re-age, extension,
changes that may be necessary as a           additional guidance for fixed payment       deferral, or rewrite should occur during
result of changes to the bankruptcy          programs. Although no specific              any 12 month period.
code.                                        language is included in this policy,           • The account should exist for at least
   Fraud: Commenters were divided            when an institution grants interest rate    12 months before a re-aging, extension,
equally with respect to the time             or principal concessions under a fixed      deferral, or rewrite is allowed.
required to charge off fraudulent loans,     payment program, and those                     • No more than two re-agings,
either 30 days or 90 days. The FFIEC         concessions are material, the institution   extensions, deferrals, or rewrites should
recognized that a fraud investigation        should follow generally accepted            occur in the lifetime of the account.
may last more than 30 days. For that         accounting principles (GAAP)                   • The re-aged balance in the account
reason, the FFIEC is proposing that          guidelines presented in Financial           should not exceed the predelinquency
fraudulent retail credit should be           Accounting Standards Board (FASB) 15        credit limit.
charged off within 90 days of discovery      (Accounting by Debtors and Creditors           • A re-aged, extended, deferred, or
or within the charge-off time frames         for Troubled Debt Restructuring) and        rewritten loan should be documented
adopted in this classification policy,       FASB 114 (Accounting by Creditors for       adequately.
whichever is shorter.                        Impairment of a Loan).
                                                                                         5. Residential and Home Equity Loans
   Deceased Accounts: The majority of
commenters reported that they needed         4. Re-aging, Extension, Renewal,               The September notice requested
150 days to work with the trustee of an      Deferral, or Rewrite Policy                 comment on whether residential and
estate to determine the repayment               The September notice proposed and        home equity loans should be classified
potential of loans of deceased persons.      requested comment on supervisory            Substandard at a certain delinquency
The FFIEC recognizes that working with       standards for re-aging accounts.            and whether a collateral evaluation
the trustee or the deceased family may          Re-aging is the practice of bringing a   should be required at a certain
take months to determine repayment           delinquent account current after the        delinquency.
potential. The FFIEC proposes that retail    borrower has demonstrated a renewed            Twenty-eight of 37 commenters
credit loans of deceased persons should      willingness and ability to repay the loan   agreed with classifying residential and
be evaluated and charged off when the        by making some, but not all, past due       home equity loans Substandard when
loss is determined, or within the charge-    payments. A liberal re-aging policy on      they are 90 days delinquent. The
off time frames adopted in this              credit card accounts, or an extension,      proposed policy statement classifies
classification policy, whichever is          deferral, or rewrite policy on closed-end   certain residential and home equity
shorter.                                     credit, can cloud the true performance      loans Substandard at 90 days
                                             and delinquency status of the accounts.     delinquent. However, the FFIEC
3. Partial Payments                          The majority of commenters agreed that      recognizes that delinquent, low loan-to-
   The September notice requested            the borrower should show a renewed          value loans (i.e., those loans less than or
comment on whether borrowers should          willingness and ability to repay, re-       equal to 60 percent of the real estate’s
receive credit for partial payments in       aging should occur after receipt of three   value based on the most current
determining delinquency by giving            months consecutive or equivalent lump       appraisal or evaluation) possess little
credit for any payment received and if       sum payments, the account should be         likelihood for loss as they are protected
36406                     Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

adequately by the real estate. Those            • Classify certain delinquent                            • [Option 1]: Open-end and closed-
loans will be exempted from the              residential mortgage and home equity                     end retail loans that become past due
proposed classification policy. The          loans; and                                               150 cumulative days or more from the
FFIEC proposes that, if an institution          • Broaden the recognition of partial                  contractual due date should be charged
holds a first-lien residential real estate   payments that qualify as a full payment.                 off. The charge off should be effected by
loan and a home equity loan to the same         The FFIEC considered the effect of                    the end of the month in which the
borrower, and if the combined loan-to-       GAAP on this guidance. GAAP requires                     requirement is triggered. Open-end and
value ratio exceeds 60 percent, the loans    that a loss be recognized promptly for                   closed-end retail loans that are past due
should be classified as substandard          assets or portions of assets deemed                      90 days or more, but less than 150
when both are delinquent more than 90        uncollectible. The FFIEC believes that                   cumulative days, should be classified
days. If only the residential real estate    this guidance requires prompt                            Substandard or
loan is delinquent or if only the home       recognition of losses, and therefore, is                    • [Option 2]: Closed-end retail loans
equity loan is delinquent, only the          consistent with GAAP.                                    that become past due 120 cumulative
delinquent loan is classified                   This proposed policy statement, if                    days and open-end retail loans that
substandard. If the institution only         adopted, will apply to all regulated                     become past due 180 cumulative days
holds the home equity loan and does          financial institutions and their operating               from the contractual due date should be
not hold other prior residential             subsidiaries supervised by the FRB,                      charged off. The charge off should be
mortgages to the same borrower, and the      FDIC, OCC, and OTS.                                      effected by the end of the month in
loan is delinquent 90 days or more, it          The proposed text of the statement is                 which the requirement is triggered.
should be classified Substandard.            as follows:                                              Open-end and closed-end retail loans
  The majority of commenters                                                                          that are past due 90 days or more should
                                             Uniform Retail Credit Classification
supported a collateral evaluation by the                                                              be classified Substandard.2
                                             Policy 1
time the loan is 180 days delinquent.                                                                    • Unsecured loans for which the
The proposed policy statement calls for        Evidence of the quality of consumer                    borrower declared bankruptcy should be
a current evaluation of the collateral to    credit soundness is indicated best by the                charged off by the end of the month in
be made by the time a residential or         repayment performance demonstrated                       which the creditor receives notification
home equity loan is: (1) 150 days past       by the borrower. When loans become                       of filing from the bankruptcy court, or
due, if option one under the charge off      seriously delinquent (90 days or more                    within the charge-off time frames
time frames is selected, or (2) 120 days     contractually past due), they display                    adopted in this classification policy,
past due for closed-end credit and 180       weaknesses that, if left uncorrected, may                whichever is shorter.
days past due for open-end credit, if        result in a loss. Because retail credit                     • For secured and partially secured
option 2 is selected. The outstanding        generally is comprised of a large number                 loans in bankruptcy, the collateral and
balance in the loan in excess of fair        of relatively small balance loans,                       the institution’s security position in the
value of the collateral, less the cost to    evaluating the quality of the retail credit              bankruptcy court should be evaluated.
sell, should be classified Loss and the      portfolio on a loan-by-loan basis is                     Any outstanding investment in the loan
balance classified Substandard.              inefficient and burdensome to the                        in excess of the fair value of the
                                             institution being examined and to                        collateral, less the cost to sell, should be
6. Need for Additional Retail Credit         examiners. Therefore, in general, retail                 charged off within 30 days of
Guidance                                     credit should be classified based on the                 notification of filing from the
                                             following criteria:                                      bankruptcy court, or within the time
   The September notice requested
                                                                                                      frames in this classification policy,
comment as to whether additional                1 The regulatory classifications used for retail
                                                                                                      whichever is shorter. The remainder of
supervisory guidance is needed or            credit are Substandard, Doubtful, and Loss. These        the loan should be classified
would be beneficial. Comments were           are defined as follows: Substandard: An asset
                                             classified Substandard is protected inadequately by      Substandard until the borrower re-
also sought as to whether additional
                                             the current net worth and paying capacity of the         establishes the ability and willingness to
supervisory guidance is needed on the        obligor, or by the collateral pledged, if any. Assets    repay.
loan loss reserve for retail credit.         so classified must have a well-defined weakness or          • Fraudulent loans should be charged
   The majority of commenters did not        weaknesses that jeopardize the liquidation of the
                                             debt. They are characterized by the distinct
                                                                                                      off within 90 days of discovery, or
support any other regulatory guidance.       possibility that the institution will sustain some       within the time frames in this
Any additional guidance on the               loss if the deficiencies are not corrected. Doubtful:    classification policy, whichever is
allowance for loan and lease loss will be    An asset classified Doubtful has all the weaknesses      shorter.
addressed in other policy statements.        inherent in one classified Substandard with the             • Loans of deceased persons should
                                             added characteristic that the weaknesses make
Proposed Revision                            collection or liquidation in full, on the basis of       be charged off when the loss is
                                             currently existing facts, conditions, and values,        determined, or within the time frames
  The FFIEC drafted a revised policy         highly questionable and improbable. Loss: An asset,      adopted in this classification policy,
statement in consideration of the            or portion thereof, classified Loss is considered        whichever is shorter.
                                             uncollectible, and of such little value that its
comments. The proposed policy                continuance on the books is not warranted. This
                                                                                                         • One- to four-family residential real
statement will:                              classification does not mean that the asset has          estate loans and home equity loans that
  • Establish a charge-off policy for        absolutely no recovery or salvage value; rather, it      are delinquent 90 days or more, and
                                             is not practical or desirable to defer writing off an    with loan-to-value ratios greater than
open-end and closed-end credit based         essentially worthless asset (or portion thereof), even
on delinquency under one of two              though partial recovery may occur in the future.
                                                                                                      60%, should be classified Substandard.
possible time frames;                           Although the Board of Governors of the Federal           • A current evaluation of the loan’s
                                             Reserve System, Federal Deposit Insurance                collateral should be made by the time a
  • Provide guidance for loans affected      Corporation, Office of the Comptroller of the            residential or home equity loan is: (1)
by bankruptcy, fraudulent activity, and      Currency, and Office of Thrift Supervision do not        150 days past due if option one under
death;                                       require institutions to adopt the identical
                                             classification definitions, institutions should          the charge off time frames is selected or
  • Establish standards for re-aging,        classify their assets using a system that can be
extending, deferring, or rewriting of past   easily reconciled with the regulatory classification       2 The final policy will adopt only one of these

due accounts;                                system.                                                  options.
                           Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices                               36407

(2) 120 days past due for closed-end           Partial Payments on Open-End and             should occur in the lifetime of the
credit and 180 days past due for open-         Closed-End Credit                            account.
end credit if option 2 is selected. Any          Institutions should use one of two           • The re-aged balance in the account
investment in excess of fair value of the      methods to recognize partial payments.       should not exceed the predelinquency
collateral, less cost to sell, should be       A payment equivalent to 90 percent or        credit limit.
classified Loss and the balance                more of the contractual payment may be         • An institution should ensure that a
classified Substandard.                        considered a full payment in computing       re-aged, extended, deferred, or re-
   Certain residential real estate loans       delinquency. Alternatively, the              written loan meets the agencies’ and
                                               institution may aggregate payments and       institution’s standards. The institution
with low loan-to-value ratios are exempt
                                               give credit for any partial payment          should adequately identify, discuss, and
from classification based on
                                               received. However, the account should        document any account that is re-aged,
delinquency, although these loans may                                                       extended, deferred, or re-written.
be reviewed and classified individually.       be considered delinquent until all
Residential real estate loans with a loan-     contractual payments are received. For       Examination Considerations
to-value ratio equal to, or less than, 60      example, if a regular installment
                                               payment is $300 and the borrower                Examiners should ensure that
percent should not be classified based                                                      institutions adhere to this policy.
                                               makes payments of only $150 per month
solely on delinquency status. In                                                            Nevertheless, there may be instances
                                               for a six-month period, the loan would
addition, home equity loans to the same                                                     that warrant exceptions to the general
                                               be $900 ($150 shortage times six
borrower at the same institution as the        payments), or three full months              classification policy. Loans need not be
senior mortgage loan with a combined           delinquent. Whichever method is              classified if the institution can
loan-to-value ratio equal to, or less than,    chosen, the same method should be            document clearly that repayment will
60 percent, should not be classified.          used consistently within the entire          occur irrespective of delinquency status.
However, home equity loans where the           portfolio.                                   Examples might include loans well
institution does not hold the senior                                                        secured by marketable collateral and in
mortgage that are delinquent 90 days or        Re-agings, Extensions, Deferrals, or         the process of collection, loans for
more should be classified Substandard,         Rewrites                                     which claims are filed against solvent
even if the loan-to-value ratio is                Re-aging is the practice of bringing a    estates, and loans supported by
reportedly equal to, or less than, 60          delinquent account current after the         insurance.
percent.                                       borrower has demonstrated a renewed             The uniform classification policy does
                                               willingness and ability to repay the loan    not preclude examiners from reviewing
   The use of delinquency to classify
                                               by making some, but not all, past due        and classifying individual large dollar
retail credit is based on the presumption                                                   retail credit loans, which may or may
                                               payments. A permissive re-aging policy
that delinquent loans display a serious                                                     not be delinquent, but exhibit signs of
                                               on credit card accounts, or an extension,
weakness or weaknesses that, if                                                             credit weakness.
                                               deferral, or re-write policy on closed-
uncorrected, demonstrate the distinct          end credit, can cloud the true                  In addition to loan classification, the
possibility that the institution will          performance and delinquency status of        examination should focus on the
suffer a loss of either principal or           the accounts. However, prudent use of        institution’s allowance for loan and
interest. However, if an institution can       the re-aging policy is acceptable when it    lease loss and its risk and account
clearly document that the delinquent           is based on recent, satisfactory             management systems, including retail
loan is well secured and in the process        performance and the borrower’s other         credit lending policy, adherence to
of collection, such that collection will       positive credit factors and when it is       stated policy, and operating procedures.
occur regardless of delinquency status,        structured in accordance with the            Internal controls should be in place to
then the loan need not be classified. A        institution’s internal policies.             assure that the policy is followed.
well secured loan is collateralized by a       Institutions that re-age open-end            Institutions lacking sound policies or
perfected security interest on, or pledges     accounts, or extend, defer, or re-write      failing to implement or effectively
of, real or personal property, including       closed-end accounts, should establish a      follow established policies will be
securities, with an estimated fair value,      written policy, ensure its                   subject to criticism.
less cost to sell, sufficient to recover the   reasonableness, and adhere to it. An         Request for Comment
recorded investment in the loan, as well       account eligible for re-aging, extension,
as a reasonable return on that amount.         deferral, or rewrite exhibits the               The FFIEC is requesting comments on
In the process of collection means that        following:                                   all aspects of the proposed policy
either collection efforts or legal action is      • The borrower should show a              statement. In addition, the FFIEC also is
proceeding, and is reasonably expected         renewed willingness and ability to           asking for comment on a number of
to result in recovery of the recorded          repay the loan.                              issues affecting the charge-off policy
investment in the loan or its restoration         • The borrower should make at least       and will consider the answers before
to a current status, generally within the      three consecutive contractual payments       developing the final policy statement:
next 90 days.                                  or the equivalent lump sum payment              1. What would be the costs and
                                               (funds may not be advanced by the            benefits of the uniform 150 day charge-
   This policy does not preclude an            institution for this purpose).               off time frame? What would be the costs
institution from adopting an internal             • No loan should be re-aged,              and benefits of leaving the policy at the
classification policy more conservative        extended, deferred, or rewritten more        current 120/180 day charge-off time
than the one detailed above. It also does      than once within the preceding 12            frames? The FFIEC welcomes historical
not preclude a regulatory agency from          months.                                      statistical evidence showing the dollars
using the Doubtful classification in              • The account should exist for at least   and percentages of open-end accounts
certain situations if a rating more severe     12 months before a re-aging, extension,      collected between 120 days delinquency
than Substandard is justified. Nor does        deferral, or re-write is allowed.            and 150 days delinquency and between
it preclude a charge-off sooner when              • No more than two re-agings,             150 days delinquency and 180 days
accounts are recognized as Loss.               extensions, deferrals, or re-writes          delinquency.
36408                         Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

   2. What will be the effect of the                  1. Keith Ray Loeffler, Allendale,            Board of Governors of the Federal Reserve
proposed two time frame charge-off                 Illinois; to acquire additional voting        System, June 29, 1998.
options on institutions? If possible,              shares of Allendale Bancorp, Inc.,            Robert deV. Frierson,
please quantify, in dollar amounts and             Allendale, Illinois, and thereby              Associate Secretary of the Board.
percentages (of total operating                    indirectly acquire First National Bank of     [FR Doc. 98–17741 Filed 7-2-98; 8:45 am]
expenses), the impact of the proposed              Allendale, Allendale, Illinois.               BILLING CODE 6210-01-F
options in the charge-off policy in the              Board of Governors of the Federal Reserve
first year of implementation and in                System, June 29, 1998.
subsequent years for open-end and                  Robert deV. Frierson,                         FEDERAL RESERVE SYSTEM
closed-end credits on:                             Associate Secretary of the Board.
   (a) gross and net charge-offs;                                                                Notice of Proposals to Engage in
                                                   [FR Doc. 98–17742 Filed 7-2-98; 8:45 am]      Permissible Nonbanking Activities or
   (b) recoveries;
                                                   BILLING CODE 6210-01-F                        to Acquire Companies that are
   (c) earnings; and
   (d) securitization transactions.                                                              Engaged in Permissible Nonbanking
   3. What are the expected dollar costs                                                         Activities
                                                   FEDERAL RESERVE SYSTEM
of reprogramming to implement the first                                                             The companies listed in this notice
option (uniform charge-off policy at 150           Formations of, Acquisitions by, and           have given notice under section 4 of the
days past due) and what percentage of              Mergers of Bank Holding Companies             Bank Holding Company Act (12 U.S.C.
total operating expenses do those                                                                1843) (BHC Act) and Regulation Y, (12
programming dollars represent? Also,                 The companies listed in this notice         CFR Part 225) to engage de novo, or to
can the programming changes be                     have applied to the Board for approval,       acquire or control voting securities or
completed by the proposed January 1,               pursuant to the Bank Holding Company          assets of a company, including the
2001 implementation date?                          Act of 1956 (12 U.S.C. 1841 et seq.)          companies listed below, that engages
   4. Please provide any other                     (BHC Act), Regulation Y (12 CFR Part          either directly or through a subsidiary or
information that the FFIEC should                  225), and all other applicable statutes       other company, in a nonbanking activity
consider in determining the final policy           and regulations to become a bank              that is listed in § 225.28 of Regulation
statement including the optimal                    holding company and/or to acquire the         Y (12 CFR 225.28) or that the Board has
implementation date for the proposed               assets or the ownership of, control of, or    determined by Order to be closely
changes.                                           the power to vote shares of a bank or         related to banking and permissible for
  Dated: June 30, 1998.                            bank holding company and all of the           bank holding companies. Unless
Keith J. Todd,                                     banks and nonbanking companies                otherwise noted, these activities will be
Acting Executive Secretary, Federal Financial      owned by the bank holding company,            conducted throughout the United States.
Institutions Examination Council.                  including the companies listed below.            Each notice is available for inspection
[FR Doc. 98–17782 Filed 7–2–98; 8:45 am]             The applications listed below, as well      at the Federal Reserve Bank indicated.
BILLING CODE 6210–01–P, 25% 6714–01–P, 25% 6720–   as other related filings required by the      The notice also will be available for
01–P, 25% 4810–33–P 25%                            Board, are available for immediate            inspection at the offices of the Board of
                                                   inspection at the Federal Reserve Bank        Governors. Interested persons may
                                                   indicated. The application also will be       express their views in writing on the
                                                   available for inspection at the offices of    question whether the proposal complies
                                                   the Board of Governors. Interested            with the standards of section 4 of the
Change in Bank Control Notices;                    persons may express their views in            BHC Act.
Acquisitions of Shares of Banks or                 writing on the standards enumerated in           Unless otherwise noted, comments
Bank Holding Companies                             the BHC Act (12 U.S.C. 1842(c)). If the       regarding the applications must be
                                                   proposal also involves the acquisition of     received at the Reserve Bank indicated
  The notificants listed below have                a nonbanking company, the review also         or the offices of the Board of Governors
applied under the Change in Bank                   includes whether the acquisition of the       not later than July 20, 1998.
Control Act (12 U.S.C. 1817(j)) and §              nonbanking company complies with the             A. Federal Reserve Bank of Boston
225.41 of the Board’s Regulation Y (12             standards in section 4 of the BHC Act.        (Richard Walker, Community Affairs
CFR 225.41) to acquire a bank or bank              Unless otherwise noted, nonbanking            Officer) 600 Atlantic Avenue, Boston,
holding company. The factors that are              activities will be conducted throughout       Massachusetts 02106-2204:
considered in acting on the notices are            the United States.                               1. UST Corp., Boston, Massachusetts;
set forth in paragraph 7 of the Act (12                                                          to acquire through Cambridge Trade
                                                     Unless otherwise noted, comments
U.S.C. 1817(j)(7)).                                                                              Finance Corp., Boston, Massachusetts
                                                   regarding each of these applications
  The notices are available for                                                                  certain assets of Cambridge Trading
                                                   must be received at the Reserve Bank
immediate inspection at the Federal                                                              Services Corporation, Boston,
                                                   indicated or the offices of the Board of
Reserve Bank indicated. The notices                                                              Massachusetts, and thereby engage in
                                                   Governors not later than July 28, 1998.
also will be available for inspection at                                                         extending credit and servicing loans,
the offices of the Board of Governors.               A. Federal Reserve Bank of Cleveland        pursuant to § 225.28(b)(1).
Interested persons may express their               (Paul Kaboth, Banking Supervisor) 1455           B. Federal Reserve Bank of New York
views in writing to the Reserve Bank               East Sixth Street, Cleveland, Ohio            (Betsy Buttrill White, Senior Vice
indicated for that notice or to the offices        44101-2566:                                   President) 33 Liberty Street, New York,
of the Board of Governors. Comments                  1. FNB Corporation, Hermitage,              New York 10045-0001:
must be received not later than July 20,           Pennsylvania, and Southwest Banks,               1. Deutsche Bank AG, Frankfurt,
1998.                                              Inc.; to merge with Citizens Holding          Main, Federal Republic of Germany; to
  A. Federal Reserve Bank of St. Louis             Corporation, Clearwater, Florida, and         acquire Bouclier Vert Limite’ L.L.C. d/
(Randall C. Sumner, Vice President) 411            thereby indirectly acquire Citizens Bank      b/a/ Green Shield Limited, L.L.C.,
Locust Street, St. Louis, Missouri 63102-          and Trust Company, Clearwater,                Woodbury, New Jersey, and thereby
2034:                                              Florida.                                      engage in residential mortgage

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