District Circular Letters
July 15, 1998
BANKING SUPERVISION AND REGULATION:
UNIFORM RETAIL CREDIT CLASSIFICATIONS
To State Member Banks, Bank Holding Companies,
U.S. Branches and Agencies of Foreign Banks,
and Others Concerned
in the Twelfth Federal Reserve District
Proposed Policy for Uniform Retail Credit Classifications
Federal bank regulators have issued proposals for retail credit classification
policies and asked for public comments on two time-frame options for classifying
retail loans. The policies would guide banks and bank regulators in classifying
a consumer loan that is not being repaid under its original terms.
The Uniform Retail Credit Classification Policy
(PDF) proposals would update the classification policy for open-end and
closed-end credit that was issued in 1980. Under the existing policy,
open-end credit, like credit cards, is charged off after a 180-day delinquent
period or after seven consecutive unpaid bills; closed-end credit, like
installment loans, is charged-off after a loan is delinquent for 120 days.
Comment is requested by September 4, 1998, and should
be faxed to (202) 634-6556 or mailed to
Executive Secretary, FFIEC
2100 Pennsylvania Ave., N.W., Suite 200
Washington, DC 20037
The regulators are seeking specific comments on two alternative options
for classifying open-end and closed-end retail loans. Option one would
charge off delinquent retail loans if they are past due 150 days or more
from the contractual due date. Option two, which is similar to the existing
policy, would charge off delinquent closed-end retail loans that become
past due 120 cumulative days and delinquent open-end retail loans that
become past due 180 cumulative days.
Under both options, closed-end and open-end retail loans would continue
to be classified "substandard" once they become ninety days
past due. A delinquent loan need not be classified, however, if an institution
can clearly document that the loan is well-secured and in the process
of collection.
Delinquency is used to classify retail credit because of the presumption
that delinquent loans display serious weaknesses that, if uncorrected,
are likely to cause the financial institution to suffer a loss of either
principal or interest. The evaluation of small retail credit balances
on a loan-by-loan basis is inefficient and burdensome.
The federal bank regulators are proposing the following new guidance:
- Unsecured loans to borrowers who subsequently 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,
or within the charge-off time frames adopted in the classification policy,
whichever is shorter.
- Secured and partially secured loans to borrowers who declare bankruptcy
should be evaluated for repayment potential. Any loss should be charged
off within thirty 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 bank determines the amount of loss or within the charge-off
time frames, whichever is shorter.
- One-to-four-family residential real estate loans and home equity
loans that are delinquent ninety days or more and with loan-to-value
ratios greater than 60 percent should be classified "substandard."
The proposed policy also details criteria that must be met before banks
and thrifts may consider a delinquent open-end account current, such as
the process of account re-aging, and to extend, defer, and rewrite delinquent
closed-end loans.
The changes are being proposed by the federal regulatory agencies--the
Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Board of Governors of the Federal Reserve System, and
the Office of Thrift Supervision, working together as members of the Federal
Financial Institutions Examination Council (FFIEC).
Copies
Copies of the FFIEC notice
are available from our Corporate Services Department. To request copies
to be sent via mail, please call (415) 974-2748. To request
copies to be sent via fax, please call (415) 974-3333, and
specify document number 4119. The notice was published
by FFIEC in the Federal Register on July 6, 1998.
Additional Information
For additional information regarding these matters, please contact our
Banking Supervision and Regulation Department, at (415) 974-2929.
FEDERAL RESERVE BANK OF SAN FRANCISCO
|
