District Circular Letters

February 9, 2001

BANKING SUPERVISION AND REGULATION:
SUBPRIME LENDING

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

Agencies Release Expanded Guidance for Subprime Lending Programs (SR 01-4 [GEN])

The Board of Governors of the Federal Reserve System, along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, has developed an expanded examination guidance on subprime lending. The purpose of the expanded guidance is to strengthen the Agencies' supervision of institutions with subprime lending programs. The guidance is directed primarily to those institutions that have subprime lending programs that equal or exceed 25 percent of tier 1 regulatory capital.

The Agencies believe that responsible subprime lending can expand credit access for consumers and can offer attractive returns, provided that institutions recognize and manage the unique risks associated with this activity. This expanded guidance supplements the supervisory statement, "Interagency Guidance on Subprime Lending" (See SR letter 99-06; Twelfth District letter published March 17, 1999) issued in March 1999.

The guidance discusses a number of issues including the following:

• The characteristics of a subprime lending program

• A set of specific borrower characteristics that may indicate an institution is involved in the subprime lending market
• The analysis and the documentation standards for the allowance for loan and lease losses (ALLL).
• The factors to consider when determining the appropriate level of capital needed to support subprime lending
• A discussion of examination procedures for assessing the quality of subprime loan portfolios
• A list of potentially predatory or abusive lending practices that safety and soundness examiners would criticize

Copies

Copies of the Board's notice, SR 01-4 (GEN), are available from our Corporate Services Department. To request copies to be sent by mail, please call (415) 974-2060.

All circulars and documents are available on the Internet through the Federal Reserve Bank of San Francisco's Internet site, at http://www.frbsf.org/banking/letters/index.html.

Additional Information

For additional information about the expanded Guidance for Subprime Lending Programs, please contact our Banking Supervision and Regulation Department, at (213) 683-2762.

FEDERAL RESERVE BANK OF SAN FRANCISCO