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Federal Reserve Bank
of Dallas
DALLAS, TEXAS
75265-5906
June 23, 2000
Notice 2000-39
TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Revised Uniform Retail Credit
Classification and Account Management Policy
DETAILS
The Federal Financial Institutions Examination Council (FFIEC), on behalf of the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation,
the Office of the Comptroller of the Currency, and the Office of Thrift Supervision (collectively
referred to as the agencies), has issued revisions to the Uniform Retail Credit Classification and
Account Management Policy.
The policy is used by the agencies for uniform classification and treatment of retail
credit loans in financial institutions. The policy revisions 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, also a member of the FFIEC, does
not plan to adopt the policy at this time.
Any changes to an institution’s policies and procedures resulting from the revisions
should be implemented for reporting in the December 31, 2000, Call Report or Thrift Financial
Report as appropriate.
ATTACHMENT
A copy of the FFIEC’s notice as it appears on pages 36903–06, Vol. 65, No. 113 of
the Federal Register dated June 12, 2000, is attached.
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
-2-
MORE INFORMATION
For more information, please contact Lynn Black at (214) 922-6069 or Daniel
Kirkland at (214) 922-6256 in the Banking Supervision Department. For additional copies of this
Bank’s notice, contact the Public Affairs Department at (214) 922-5254 or access District
Notices on our web site at http://www.dallasfed.org/banking/notices/index.html.
Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36903
Division, Chief Counsel’s Office, Office Policy allowed institutions until the
of the Comptroller of the Currency, 250 December 31, 2000, Reports to make
E Street, SW., Washington, DC 20219. changes involving computer
FDIC: James Leitner, Examination programming resources. In a
Specialist, (202) 898–6790, Division of modification issued on November 23,
Supervision, or Michael Phillips, 1999 (64 FR 65712), the implementation
Counsel, (202) 898–3581, Supervision date for manual changes was extended
and Legislation Branch, Legal Division, to the December 31, 2000, Reports.
FEDERAL FINANCIAL INSTITUTIONS Federal Deposit Insurance Corporation, Following the issuance of the Uniform
EXAMINATION COUNCIL 550 17th Street, N.W., Washington, D.C. Policy, the Agencies received numerous
Uniform Retail Credit Classification 20429. inquiries for clarifications of the
OTS: William J. Magrini, Senior standards contained in the Policy,
and Account Management Policy
Project Manager, (202) 906–5744, Donna especially with respect to the re-aging of
AGENCY: Federal Financial Institutions M. Deale, Manager, Supervision Policy, open-end accounts and extensions,
Examination Council. (202) 906–7488, Supervision Policy, or deferrals, renewals, or rewrites of
ACTION: Final notice. Ellen J. Sazzman, Counsel (Banking and closed-end loans. In response to these
Finance), (202) 906–7133, Regulations inquiries for clarification, the Agencies
SUMMARY: The Federal Financial and Legislation Division, Chief have decided to publish this revised
Institutions Examination Council Counsel’s Office, Office of Thrift Uniform Policy. In addition to various
(FFIEC), on behalf of the Board of Supervision, 1700 G Street, N.W., editorial changes, the Agencies have
Governors of the Federal Reserve Washington, D.C. 20552. changed the Uniform Policy to clarify
System (FRB), the Federal Deposit SUPPLEMENTARY INFORMATION: various items in the Uniform Policy
Insurance Corporation (FDIC), the Office with respect to (1) the re-aging of open-
of the Comptroller of the Currency Background Information end accounts; (2) extensions, deferrals,
(OCC), and the Office of Thrift On June 30, 1980, the FRB, FDIC, and renewals, and rewrites of closed-end
Supervision (OTS), collectively referred OCC adopted the Uniform Policy for loans; (3) examiner considerations; and
to as the Agencies, is publishing Classification of Consumer Installment (4) the treatment of specific categories of
revisions to the Uniform Retail Credit Credit Based on Delinquency Status retail loans.
Classification and Account Management (1980 policy). The Federal Home Loan 1. Re-aging of open-end accounts. The
Policy, to clarify certain provisions, Bank Board, the predecessor of the OTS, Uniform Policy provided that open-end
especially regarding the re-aging of adopted the 1980 policy in 1987. The accounts should not be re-aged more
open-end accounts and extensions, 1980 policy established uniform than once within any twelve-month
deferrals, renewals, and rewrites of guidelines for the classification of retail period and no more than twice within
closed-end loans. The National Credit installment credit based on delinquency any five-year period. The Agencies have
Union Administration (NCUA), also a status and provided charge-off time decided to clarify the Uniform Policy by
member of FFIEC, does not plan to frames for open-end and closed-end stating that institutions may adopt a
adopt the Uniform Policy at this time. credit. more conservative re-aging standard
This Policy is a supervisory policy used The Agencies undertook a review of (e.g., some institutions allow only one
by the Agencies for uniform the 1980 policy as part of their review re-aging in the lifetime of an open-end
classification and treatment of retail of all written policies mandated by account). In addition, this modification
credit loans in financial institutions. Section 303(a) of the Riegle Community of the Uniform Policy recognizes the
Development and Regulatory importance of formal workout programs
DATES: Any changes to an institution’s
Improvement Act of 1994. As a result of and provides guidance on the handling
policies and procedures as a result of of open-end accounts that enter into this
the Uniform Retail Credit Classification this review, on February 10, 1999 (64 FR
6655), the Agencies issued the Uniform type of program.
and Account Management Policy issued Specifically, the Agencies have
on February 10, 1999, as modified by Retail Credit Classification and Account
Management Policy (Uniform Policy). In modified the Uniform Policy to provide
these revisions, should be implemented that institutions may re-age an account
for reporting in the December 31, 2000, general, the Uniform Policy:
• Established a charge-off policy for after it enters a workout program,
Call Report or Thrift Financial Report, including internal and third-party debt
as appropriate. open-end credit at 180 days
delinquency and closed-end credit at counseling services, but only after
FOR FURTHER INFORMATION CONTACT: receipt of at least three consecutive
120 days delinquency.
FRB: David Adkins, Supervisory • Provided guidance for loans minimum monthly payments or the
Financial Analyst, (202) 452–5259, or affected by bankruptcy, fraud, and equivalent cumulative amount. Re-aging
Anna Lee Hewko, Financial Analyst, death. for workout program purposes is limited
(202) 530–6260, Division of Banking • Established guidelines for re-aging, to once in a five-year period and is in
Supervision and Regulation, Board of extending, deferring, or rewriting past addition to the once-in-twelve-months/
Governors of the Federal Reserve due accounts. twice-in-five-years limitation. The term
System. For the hearing impaired only, • Provided for classification of certain ‘‘re-age’’ is defined in the document (in
Telecommunication Device for the Deaf delinquent residential mortgage and footnote 3) to mean ‘‘returning a
(TDD), Diane Jenkins, (202) 452–3544, home equity loans. delinquent, open-end account to current
Board of Governors of the Federal • Provided an alternative method of status without collecting the total
Reserve System, 20th and C Streets, recognizing partial payments. amount of principal, interest, and fees
N.W., Washington, D.C. 20551. As issued on February 10, 1999, the that are contractually due.’’ In the
OCC: Daniel L. Pearson, National Uniform Policy was effective for manual Agencies’ view, management
Bank Examiner, (202) 874–5170, Credit adjustments to an institution’s policies information systems should track the
Risk Division, or Ron Shimabukuro, and procedures as of the June 30, 1999, principal reductions and charge-off
Senior Attorney, (202) 874–5090, Call Report or Thrift Financial Report, history of loans in workout programs by
Legislative and Regulatory Activities as appropriate. In addition, the Uniform type of program.
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36904 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices
2. Extensions, deferrals, renewals, and Uniform Policy that such assessment collection experience, when a
rewrites of closed-end loans. The would be required when a residential or portfolio’s history reflects high losses
Agencies have modified the Uniform home equity loan is 120 days past due. and low recoveries, more conservative
Policy to provide that institutions • Loans in bankruptcy with collateral standards are appropriate and
should adopt and adhere to explicit may be written down to the value of the necessary.
standards that control the use of collateral, less cost to sell. The quality of retail credit is best
extensions, deferrals, renewals, and As modified, the Uniform Policy now indicated by the repayment performance
rewrites of closed-end loans. Such reads as follows: of individual borrowers. Therefore, in
standards would be based on the general, retail credit should be classified
Uniform Retail Credit Classification
borrower’s willingness and ability to based on the following criteria:
and Account Management Policy 1
repay the loan and would limit number • Open- and closed-end retail loans
and frequency of such treatment of The Uniform Retail Credit past due 90 cumulative days from the
closed-end loans. The Agencies have Classification and Account Management contractual due date should be
also defined the terms ‘‘extension,’’ Policy establishes standards for the classified Substandard.
‘‘deferral,’’ ‘‘renewal,’’ and ‘‘rewrite.’’ classification and treatment of retail • Closed-end retail loans that become
This modification of the Uniform credit in financial institutions. Retail past due 120 cumulative days and open-
Policy states that institutions should credit consists of open- and closed-end end retail loans that become past due
adopt standards that prohibit additional credit extended to individuals for 180 cumulative days from the
advances that finance the unpaid household, family, and other personal contractual due date should be
interest and fees. The Agencies have expenditures, and includes consumer classified Loss and charged off.2 In lieu
added guidance that comprehensive and loans and credit cards. For purposes of of charging off the entire loan balance,
effective risk management, reporting, this policy, retail credit also includes loans with non-real estate collateral may
and internal controls be established and loans to individuals secured by their be written down to the value of the
maintained to support the collection personal residence, including first collateral, less cost to sell, if
process and to ensure timely recognition mortgage, home equity, and home repossession of collateral is assured and
of losses. improvement loans. Because a retail in process.
3. Examination considerations. The credit portfolio generally consists of a • One- to four-family residential real
Agencies have added guidance that an large number of relatively small-balance estate loans and home equity loans that
examiner may classify retail portfolios, loans, evaluating the quality of the retail are past due 90 days or more with loan-
or segments thereof, where underwriting credit portfolio on a loan-by-loan basis to-value ratios greater than 60 percent
standards are weak and present is inefficient and burdensome for the should be classified Substandard.
unreasonable credit risk and may institution being examined and for Properly secured residential real estate
criticize account management practices examiners. loans with loan-to-value ratios equal to
that are deficient. Actual credit losses on individual or less than 60 percent are generally not
Adoption of the Uniform Policy may retail credits should be recorded when classified based solely on delinquency
affect an institution’s timing and the institution becomes aware of the status. Home equity loans to the same
measurement of probable loan losses loss, but in no case should the charge- borrower at the same institution as the
that have been incurred. As a result of off exceed the time frames stated in this senior mortgage loan with a combined
changes the Uniform Policy made to the policy. This policy does not preclude an loan-to-value ratio equal to or less than
1980 policy, an institution may need to institution from adopting a more 60 percent need not be classified.
adjust its loan loss allowance to reflect conservative internal policy. Based on However, home equity loans where the
any shortening in its time frame for institution does not hold the senior
recording charge-offs. Moreover, a larger 1 The agencies’ classifications used for retail mortgage, that are past due 90 days or
allowance may be necessary if an credit are Substandard, Doubtful, and Loss. These more should be classified Substandard,
institution’s charge-off practices are are defined as follows: Substandard: An asset even if the loan-to-value ratio is equal
classified Substandard is protected inadequately by
different than the new guidelines for the current net worth and paying capacity of the
to, or less than, 60 percent.
accounts of deceased persons and obligor, or by the collateral pledged, if any. Assets For open- and closed-end loans
accounts of borrowers in bankruptcy. so classified must have a well-defined weakness or secured by residential real estate, a
4. Treatment of specific categories of weaknesses that jeopardize the liquidation of the current assessment of value should be
debt. They are characterized by the distinct made no later than 180 days past due.
retail loans. These modifications to the possibility that the institution will sustain some
Uniform Policy clarified the Policy’s loss if the deficiencies are not corrected. Doubtful: Any outstanding loan balance in excess
treatment of various categories of retail An asset classified Doubtful has all the weaknesses of the value of the property, less cost to
loans: inherent in one classified Substandard with the sell, should be classified Loss and
added characteristic that the weaknesses make
• Regarding retail loans that are due charged off.
to be charged off, in lieu of charging off
collection or liquidation in full, on the basis of • Loans in bankruptcy should be
currently existing facts, conditions, and values,
the entire loan balance, loans with non- highly questionable and improbable. Loss: An asset, classified Loss and charged off within
real estate collateral may be written or portion thereof, classified Loss is considered
uncollectible, and of such little value that its 2 For operational purposes, whenever a charge-off
down to the value of the collateral, less continuance on the books is not warranted. This is necessary under this policy, it should be taken
cost to sell, if repossession of collateral classification does not mean that the asset has no later than the end of the month in which the
is assured and in process. absolutely no recovery or salvage value; rather, it applicable time period elapses. Any full payment
• For open- and closed-end loans is not practical or desirable to defer writing off an received after the 120- or 180-day charge-off
secured by one-to four-family essentially worthless asset (or portion thereof), even threshold, but before month-end charge-off, may be
though partial recovery may occur in the future. considered in determining whether the charge-off
residential real estate, a current Although the Board of Governors of the Federal remains appropriate.
assessment of value should be made no Reserve System, Federal Deposit Insurance OTS regulation 12 CFR 560.160(b) allows savings
later than 180 days past due, and any Corporation, Office of the Comptroller of the institutions to establish adequate (specific)
outstanding loan balance in excess of Currency, and Office of Thrift Supervision do not valuation allowances for assets classified Loss in
require institutions to adopt identical classification lieu of charge-offs.
the value of the property, less cost to definitions, institutions should classify their assets Open-end retail accounts that are placed on a
sell, should be charged off. The using a system that can be easily reconciled with fixed repayment schedule should follow the charge-
Agencies removed the condition in the the regulatory classification system. off time frame for closed-end loans.
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Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices 36905
60 days of receipt of notification of Re-Aging, Extensions, Deferrals, Open-End Accounts
filing from the bankruptcy court or Renewals, and Rewrites 3 Institutions that re-age open-end
within the time frames specified in this accounts should establish a reasonable
classification policy, whichever is Re-aging of open-end accounts, and
extensions, deferrals, renewals, and written policy and adhere to it. To be
shorter, unless the institution can considered for re-aging, an account
clearly demonstrate and document that rewrites of closed-end loans can be used
to help borrowers overcome temporary should exhibit the following:
repayment is likely to occur. Loans with • The borrower has demonstrated a
collateral may be written down to the financial difficulties, such as loss of job,
medical emergency, or change in family renewed willingness and ability to
value of the collateral, less cost to sell. repay the loan.
Any loan balance not charged off should circumstances like loss of a family
member. A permissive policy on re- • The account has existed for at least
be classified Substandard until the nine months.
borrower re-establishes the ability and agings, extensions, deferrals, renewals,
or rewrites can cloud the true • The borrower has made at least
willingness to repay for a period of at three consecutive minimum monthly
least six months. performance and delinquency status of
the portfolio. However, prudent use is payments or the equivalent cumulative
• Fraudulent loans should be amount. Funds may not be advanced by
classified Loss and charged off no later acceptable when it is based on a
renewed willingness and ability to the institution for this purpose.
than 90 days of discovery or within the Open-end accounts should not be re-
time frames adopted in this repay the loan, and when it is structured
and controlled in accordance with aged more than once within any twelve-
classification policy, whichever is month period and no more than twice
shorter. sound internal policies.
within any five-year period. Institutions
• Loans of deceased persons should Management should ensure that may adopt a more conservative re-aging
be classified Loss and charged off when comprehensive and effective risk standard; for example, some institutions
the loss is determined or within the management and internal controls are allow only one re-aging in the lifetime
time frames adopted in this established and maintained so that re- of an open-end account. Additionally,
classification policy, whichever is ages, extensions, deferrals, renewals, an over-limit account may be re-aged at
shorter. and rewrites can be adequately its outstanding balance (including the
controlled and monitored by over-limit balance, interest, and fees),
Other Considerations for Classification
management and verified by examiners. provided that no new credit is extended
If an institution can clearly document The decision to re-age, extend, defer, to the borrower until the balance falls
that a past due loan is well secured and renew, or rewrite a loan, like any other below the predelinquency credit limit.
in the process of collection, such that modification of contractual terms, Institutions may re-age an account
collection will occur regardless of should be supported in the institution’s after it enters a workout program,
delinquency status, then the loan need management information systems. including internal and third-party debt
not be classified. A well-secured loan is Adequate management information counseling services, but only after
collateralized by a perfected security systems usually identify and document receipt of at least three consecutive
interest in, or pledges of, real or any loan that is re-aged, extended, minimum monthly payments or the
personal property, including securities deferred, renewed, or rewritten, equivalent cumulative amount, as
with an estimable value, less cost to sell, including the number of times such agreed upon under the workout or debt
sufficient to recover the recorded action has been taken. Documentation management program. Re-aging for
investment in the loan, as well as a normally shows that the institution’s workout purposes is limited to once in
reasonable return on that amount. In the personnel communicated with the a five-year period and is in addition to
process of collection means that either borrower, the borrower agreed to pay the once in twelve-months/twice in five-
a collection effort or legal action is the loan in full, and the borrower has year limitation described above. To be
proceeding and is reasonably expected the ability to repay the loan. To be effective, management information
to result in recovery of the loan balance effective, management information systems should track the principal
or its restoration to a current status, systems should also monitor and track reductions and charge-off history of
generally within the next 90 days. the volume and performance of loans loans in workout programs by type of
that have been re-aged, extended, program.
Partial Payments on Open-and Closed-
deferred, renewed, or rewritten and/or
End Credit Closed-End Loans
placed in a workout program.
Institutions should use one of two Institutions should adopt and adhere
methods to recognize partial payments. 3 These terms are defined as follows. Reage: to explicit standards that control the use
A payment equivalent to 90 percent or Returning a delinquent, open-end account to of extensions, deferrals, renewals, and
more of the contractual payment may be current status without collecting the total amount
of principal, interest, and fees that are contractually
rewrites of closed-end loans. The
considered a full payment in computing due. Extension: Extending monthly payments on a standards should exhibit the following:
past due status. Alternatively, the closed-end loan and rolling back the maturity by • The borrower should show a
institution may aggregate payments and the number of months extended. The account is renewed willingness and ability to
give credit for any partial payment shown current upon granting the extension. If
extension fees are assessed, they should be
repay the loan.
received. For example, if a regular collected at the time of the extension and not added • The standards should limit the
installment payment is $300 and the to the balance of the loan. Deferral: Deferring a number and frequency of extensions,
borrower makes payments of only $150 contractually due payment on a closed-end loan deferrals, renewals, and rewrites.
without affecting the other terms, including
per month for a six-month period, the
maturity, of the loan. The account is shown current
• Additional advances to finance
loan would be $900 ($150 shortage upon granting the deferral. Renewal: Underwriting unpaid interest and fees should be
times six payments), or three full a matured, closed-end loan generally at its prohibited.
months past due. An institution may outstanding principal amount and on similar terms. Management should ensure that
use either or both methods in its Rewrite: Underwriting an existing loan by
significantly changing its terms, including payment
comprehensive and effective risk
portfolio, but may not use both methods amounts, interest rates, amortization schedules, or management, reporting, and internal
simultaneously with a single loan. its final maturity. controls are established and maintained
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36906 Federal Register / Vol. 65, No. 113 / Monday, June 12, 2000 / Notices
to support the collection process and to December 31, 2000 Call Report or Thrift
ensure timely recognition of losses. To Financial Report, as appropriate.
be effective, management information
Dated: June 6, 2000.
systems should track the subsequent
principal reductions and charge-off Keith J. Todd,
history of loans that have been granted Executive Secretary, Federal Financial
an extension, deferral, renewal, or Institutions Examination Council.
rewrite. [FR Doc. 00–14704 Filed 6–9–00; 8:45 am]
BILLING CODE 6210–01–P (25%) 6714–01–P (25%) 6720–
Examination Considerations 01–P (25%) 4810–33–P (25%)
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
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