District Circular Letters

March 2, 1999

BANKING SUPERVISION AND REGULATION:
UNIFORM RETAIL CREDIT CLASSIFICATION

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

FFIEC Policy Statement Regarding Uniform Retail Credit

The Federal Financial Institutions Examination Council (FFIEC) has issued the enclosed Uniform Retail Credit Classification and Account Management Policy. This policy statement updates and expands the classification policy for retail credit loans that was first issued in 1980, and therefore supersedes SR letter 80-601 (Uniform Policy for Classification of Consumer Installment Credit).

The policy retains and clarifies a requirement that open-end accounts, such as credit card loans, that are 180 days or more past due should be charged off. Closed-end loans, such as installment loans, should be charged off after they are 120 days delinquent. Open-end and closed-end accounts will also continue to be classified "Substandard" when they become ninety days past due. In addition, the revised policy adopts the following guidance:

Unsecured retail loans to borrowers who declare bankruptcy should generally be charged off either within sixty days of receipt of notification of filing from the bankruptcy court, or within the charge-off time frames adopted in the classification policy, whichever is shorter. This policy will be reviewed if Congress enacts revised bankruptcy legislation.

Fraudulent loans should be charged off within ninety days of discovery.

In the case where a borrower dies and repayment within the required time frame is uncertain, the loan should generally be charged off either when the loss is determined, or within the classification time frame established by the policy, whichever is shorter.

One- to four-family residential real estate loans and home equity loans that are delinquent ninety days or more and have loan-to-value ratios greater than 60 percent should be classified "Substandard." If delinquency exceeds the general charge-off time frames for open-end and closed-end loans, the institution should evaluate its collateral position and classify as "Loss" any loan amount that exceeds the value of the collateral.

The policy also details criteria that should be met before banks may consider a delinquent open-end account to be current. These criteria include the process of account re-aging, extension, and deferral. For an account to be eligible for re-aging, it should meet the following conditions:

• The borrower should show a renewed willingness and ability to repay the loan.
• The account should exist for at least nine months.
• The borrower should make at least three minimum consecutive monthly payments or an equivalent lump sum payment.
• A loan should not be re-aged more than once in any twelve-month period or more than twice within a five-year period.
• New credit should not be extended to the borrower until the balance falls below the designated pre-delinquency credit limit.

FEDERAL RESERVE BANK OF SAN FRANCISCO