District Circular Letters

December 28, 1999

ASSET SECURITIZATION ACTIVITIES: INTERAGENCY GUIDANCE

UNIFORM RETAIL CREDIT CLASSIFICATION AND ACCOUNT MANAGEMENT POLICY: DELAYED EFFECTIVE DATE

To State Member Banks,
Bank Holding Companies,
Edge Act Corporations, and
U.S. Branches and Agencies of Foreign Banks
in the Twelfth Federal Reserve District

Interagency Guidance on Asset Securitization Activities (SR 99-37 SUP)

Enclosed is an interagency guidance from the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Federal Reserve Board, on asset securitization practices.

Recent examinations by these agencies have disclosed significant weaknesses in the asset securitization practices of some insured depository institutions. Securitization activities present unique and sometimes complex risks that require the attention of senior management and the board of directors.

The most frequently encountered problems stem from:

• failure to recognize and hold sufficient capital against explicit and implicit recourse obligations that frequently accompany securitizations;
• excessive or inadequately supported valuation of "retained interests;"
• liquidity risk associated with over-reliance on asset securitization as a funding source; and
• absence of adequate independent risk management and audit functions.

The interagency guidance discusses sound risk management, modeling, valuation, and disclosure practices for asset securitization.

Delayed Effective Date for Uniform Retail Credit Classification and Account Management Policy

Last February, the FFIEC -- acting on behalf of the Federal Reserve Board and the other bank regulatory agencies -- published final revisions to the Uniform Retail Credit Classification and Account Management Policy (originally issued in 1980 as the Uniform Policy for Classification of Consumer Installment Credit Based on Delinquency Status), and established two effective dates for the revised policy.

For banking organizations whose retail classification and charge-off policies were not automated, the effective date was June 30, 1999; for institutions whose policies and procedures would require adjustments to automated systems, the effective date was set at December 31, 2000.

The FFIEC has now delayed implementation, for all banking organization, until December 31, 2000. The 1980 guidance remains in effect until the new implementation period. Any institution that has already implemented manual changes to meet the revised guidelines may continue to use its revised policy and procedures, but it is not required to do so. Institutions can choose to comply with the revised guidelines at any time before December 31, 2000.

Copies

Copies of the revised guidelines (see our letter of March 2, 1999), published in the Federal Register on February 10, 1999 (pp. 6655-6659), and the FFIEC's notice delaying implementation, published in the Federal Register on November 23, 1999 (pp.65712-65713), can also be found on the Board's Internet site, at http://www.federalreserve.gov/boarddocs/SRLETTERS/1999, listed as SR 99-5 (SUP) and SR 99-36 (SUP), respectively.

Additional Information

For additional information regarding these matters, please contact our Banking Supervision and Regulation Department at (415) 974-3177 (for Interagency Guidance on Asset Securitization Activities), and (415) 974-2932 (delayed effective date for the Uniform Retail Credit Classification and Account Management Policy).