86178, TRM 178, Uniform Retail Credit Classification Policy, 0924

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86178, TRM 178, Uniform Retail Credit Classification Policy, 0924 Powered By Docstoc
					Department of the Treasury
Office of Thrift             Supervision



                                                September 24,1997                                      Number:       178




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,
                                                            Supervision
                                                                                                        Attachment
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
                                                                               POllCy
                                                                               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
FoRPuim@nwFolwAnoNooNlAcT:
                                             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
                                                                                          .sl~r”alive.
                                             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) Ch.gs-o~PoIicy   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
5”PPLEMENfARI
            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*
                   Federal   RegJster   I Vol. 62. No. 177 I Friday, September             12. 1997   I Notices                49091

meas WJlh the creditors. or some other       (4) k-Aging. Extension, Renewd, or               As the delinquency pmgnsses.
data? please explain why one date is         Lkferml Policy                                repayment becomes dependent on the
better tha” another.                           Re-aging is the practice of bringing a      sale of the real estate collateral. For
   (Z)(c) How much time is needed by an      delinquent account current after the          collateral dependent loans. GAAP
iMtit”tion to process the charge-off after   borrower demonstrated a renewed
                                                         has                               requires that any loan amount in excess
any o*e of the ba”kNptcy events              willingness and ability to repay tJaeloan     of the collateral’s fair value less cost to
identified in question Z(al7                 by ma!cing some. hut not all. past due        sell should he charged off. or that a
   [Z)(d) As an altemative to an             payments. A rmksive m-aging policy            valuation allowance be established for
Immediate &age o& would it he                on credit canr accmmta 01 an extension.       that excess ammInt. The FFIEC is
beneficial to set up a specific mserve       mnewal. or deferral policy on other           considering raquiring that an evaluation
account .t the time of the 5ling and         types of retail credit can distort the true   of the msideatial collateral he made
charge the loss to that 18M)rve mxmuIIt      perf”rmauce and delin uency stetus of         within a prescribed del’ uency time
*t the bfmkuptcy d&charge date? PIBaBe       individual accounts an% the entire                                       v
                                                                                           5ame to determine fair 1 “e.
explain the pms and cons of this             portfolio. Reaging, extension. renewal.          (S)(a) Should msidsntial and home
alteln&Jve.                                  or deferral of delinquent loans is PD         equity Jwns be classi5ed substandard at
   (2)(e) Suhmquent to nMl5catIon. how       acceptable practice when it is based on       a certain delJnque”cy [similar to the
much time b needed by an JnsUtution          mxmt. ati&ct”ry perfo-ce            sod       time psriod used in open-end and
to chargboff losses due to loan fraud?       otbm positive credit factors of the           closed-end cmditl? Ifs”. what should
   [2)(9 Subsnquent to notJfkatJon. how      bamwm and when it ls skunursd in              that delinquency bs? ~.
much tJme is needed hy an Instit”tion        accorda”ce with prudent internal                 (5)(b) Should the l?l’lEC mquim a
                                             poll&s. Institutions that m-age. extend.      collateral eval”ati”n at a certain
                                             renew. or defer accmmb should                 delinquency? If IID.  what should that
                                             establish a reasmmble policy and ens”m        delinquency time 5ame be?
(31 Partial Payments                         that it ts followed by adopting               @IN;Lfor     Additional   Retail Credit
   The ISSO policy includes a provision      appmpriate 0
that 90 percent of a ccmractti payment       noFnECg”l XZZZYy~E
                                                                                             The FFlEC notes that classi5cafion
will be considered a full payment            tbts issue. it is an ame where dform
Howewx. If less than 90 percent is           guidance is appmpriate to protect             policies am just ona component of
                                                                                           prudent J”pn portfolio managems”‘
mceived. no mcog&ian of any payment          against distonJons in the performann, of
                                                                                           Claasi5cation polides. by themselves.
is gJvea The FFIEC Js conrider@              ths c”pIumin loan portfolio. The
                                             followtn3 standards are under                 do rmt address potemial pmhlems or
eliminating Uds policy pmviaion and
                                             consideration:                                weaknesses that may exist in the
giving credit for any part&d payments
                                               (4X.91Tbe bcmmver shows a rezmwed           origination md vnderwxiti”g of such
received. If such a change is adopted. a
                                             wJllJngxmssand ability to repay the           lOUI.%
loan will be conridered one month                                                            [8)(a) What type of additional
delinquent when the sum of the mtssed        l”$$!$s~;~;~~~~in                             supervisory guidance is needed or
portions of the payment8 equals one full                                                   would he beneficial to address this or
payment. A series of partial payments        number of cordract”al payments or tile
                                             equivalent amount. How many                   other aspects of retail credit p&folio
couid result in eccwoulatlng                                                               -      emera?
delinquencies. For example. Ia regular                                                       (g&J Should them be e.ddItJonal
Jnstallmsnt payment is $300 a”d the          P”~!h%%%%$be                    magsd.
                                             axtended. renewed. or deferred once           supervisory guidance on the Joan loss
                                             within a specified time. What time            reserve for retail cmdit?
per month for a &month per&xi. the
loan would he $900. or thrse fidl            frame is appmprlate? Should them bn a         (7) fndusby Experience and Impact
months delinquent                            limit to the number of m-agings over the
                                                                                             The FFDZC welcomes comment on any
  (3](a) Should bormwsrs receive credit      life of an acco”nt? If so, what should
                                                                                           other issues that it should consider in
for partial payments in determinIng          that limit he?
                                                (4)(d) The account must be in              updating tbls olicy. Additionally. tie
delinquency using the method                 existence for a certain period of time        PPIEC would f enefit fmm receiving
described? Ifs”, would such a change         More It cm be maned. extended.                flnanciel inatitutiona’ data on their
rewire sbnificant computer                   renewed. or deferre& What time period         charge off and recovery experience rates
                                             Jsap m IMe?                                   for charged-off open.end credit. closed-
k&able       &ema&s?                            (4)&J !he loan balamx should rmt           end credit. loans in bankruptcy.
  (3)(b) If partial payments are allowed.    exceed the predellnqumicy credit limits       fraudulent loans. or loans of deceased
how should the payment be applied?           [last limit approved by bank). Is this        persons. The PPIEC is aJso interested in
  (3)~)[1) Pm rata. equally to principle     standarda pm riate?                           understanding the 5nnancialand
and interest                                    (4)(fl otJ!er. &hat other standards        business practice impact that these
  (3)(b)(2) FJrst to principle. any          should he considered?                         policy changes may have. Revisions to
remaining to interest.                                                                     the 1980 policy may result in changes
  (3JM31 other.                              (SJ Residential and Home Equity Loans         to the Cull Report. which may require
  No guidance cumtntly exJsts on fixed          No FFIEC uniform classification            ba”ks to make reponing system
payment programs. Fixed payment              policy exists for residential and home        changes. If an insut”tion’s
accounts are accounts for which a            equity loans. Since m”st of these Joaes       recommendations vary 5uomcurrent
payment plan (less than contract”all has     are underwritten using uniform credit         business practice, please provide an
been established as a result of credit       criteria. the PPIEC supports reviewing        estimate of the pmgmmming costs or
counseling. bankmptcy pmceediis. or          and classifying these portfolios on an        other costs that will be incurred to
direct negotiations.                         aggregate basis. The PPIEC is                 change the practice and report
  (3)(c) Should the FFIEC adopt policy       considering the substandard                   accurately. Some institutions have
guidance on 5xed payment pmgmms?             classification based on delinquency           securitized and sold their loans. but
What should that guidance be?                stat”x.                                       such loans are still under instit”tion
49092   Federal   Register   I Vol. 62, No. 177 I Friday.   September   12, 1997 I Notices

				
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