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Section | Description | Page | ||
---|---|---|---|---|
I. | Introduction 32k | |||
About the Manual | 09 | |||
II. | Credit Cards – General Overview 75k | |||
What is a Credit Card | 10 | |||
Industry History | 10 | |||
Card Types and Attributes | 11 | |||
General Purpose Credit Cards | 12 | |||
Standard Credit Card Programs | 12 | |||
Premium Credit Card Programs | 12 | |||
Affinity Credit Card Programs | 12 | |||
Co-branded Credit Card Programs | 12 | |||
Corporate Credit Card Programs | 13 | |||
Home Equity Credit Card Programs | 13 | |||
Cash-Secured Credit Card Programs | 13 | |||
Proprietary Credit Cards | 13 | |||
Cash-Access Credit Cards | 14 | |||
Other Types of Bankcards | 14 | |||
III. | Identifying Involvement in Credit Card Activities 77k | |||
Credit Card Specialty Banks (CCSBs) | 15 | |||
Rent-a-BINs | 15 | |||
Acquiring Bank | 16 | |||
Agent | 17 | |||
CEBA Credit Card Banks | 17 | |||
Securitizing Bank | 17 | |||
Other | 17 | |||
Resources | 17 | |||
IV. | Credit Card Program Development 83k | |||
Planning | 19 | |||
Risk Assessment | 20 | |||
Subprime Lending | 20 | |||
Management Expertise and Staffing Needs | 20 | |||
Laws, Regulations, and Other Guidance | 20 | |||
Committees | 21 | |||
Policies and Procedures | 21 | |||
Information System Needs | 22 | |||
Audits and Internal Controls | 23 | |||
Testing and Product Roll Out | 23 | |||
V. | Marketing and Acquisition 136k | |||
Marketing Channels | 24 | |||
Conventional Mail Delivery | 24 | |||
Online Methods | 24 | |||
Outbound Telemarketing | 25 | |||
Television | 25 | |||
Print Ads | 25 | |||
Special Event / In-Person Promotions | 25 | |||
"Take One" Promotions | 25 | |||
Marketing and Acquisition Methods | 26 | |||
Pre-Approved Solicitations | 26 | |||
Application Strategies | 27 | |||
Portfolio Purchases | 28 | |||
Fair and Accurate Credit Transactions Act of 2003 (FACT Act) | 28 | |||
Balance Transfer and Promotional Rate Marketing | 28 | |||
Credit Availability and Card Utility | 29 | |||
Adverse Selection | 29 | |||
Product Differentiation | 30 | |||
Testing | 30 | |||
Marketing Indices | 31 | |||
Segmentation Methods | 31 | |||
Product Line | 31 | |||
Geographic Location | 31 | |||
Vintage | 32 | |||
Acquisition Method and Marketing Channel Method | 32 | |||
Other Methods and Combinations | 33 | |||
Summary of Examination Goals – Marketing and Acquisition | 33 | |||
VI. | Purchased Portfolios and Relationships 87k | |||
Portfolio Acquisitions | 34 | |||
Purchased Credit Card Relationships | 35 | |||
Accounting | 35 | |||
Capital Limitations for PCCRs | 36 | |||
Valuation Requirements | 37 | |||
Fair Value Limitation | 37 | |||
Tier 1 Capital Limitation | 37 | |||
Tier 1 Capital Sub-limit | 37 | |||
Loan Loss Allowances for Purchased Portfolios | 37 | |||
Summary of Examination Goals – Purchased Portfolios and Relationships | 39 | |||
VII. | Underwriting and Loan Approval Process 132k | |||
General Underwriting Considerations | 40 | |||
Program-Specific Underwriting Considerations | 41 | |||
Affinity and Co-Branding Programs | 41 | |||
Private Label Programs | 42 | |||
Corporate Card Programs | 42 | |||
Subprime Credit Card Programs | 42 | |||
Home Equity Credit Card Programs | 43 | |||
Cash Secured Credit Card Lending | 44 | |||
Purchased Portfolios | 44 | |||
Comparison of Automated and Judgmental Processes | 45 | |||
Credit Bureau Preferences | 45 | |||
Post-Screening | 46 | |||
FACT Act | 46 | |||
Multiple Accounts | 46 | |||
Initial Credit Line Assignments | 47 | |||
Policy and Underwriting Exceptions | 47 | |||
Indices and Reporting | 48 | |||
Summary of Examination Goals – Underwriting and Loan Approval Process | 49 | |||
VIII. | Scoring and Modeling 173k | |||
Types of Scoring | 52 | |||
FICO Scores | 52 | |||
VantageScore | 54 | |||
Other Scores | 54 | |||
Application Scoring | 54 | |||
Attrition Scoring | 54 | |||
Bankruptcy Scoring | 55 | |||
Behavior Scoring | 55 | |||
Collection Scoring | 55 | |||
Fraud Detection Scoring | 55 | |||
Payment Projection Scoring | 55 | |||
Recovery Scoring | 56 | |||
Response Scoring | 56 | |||
Revenue Scoring | 56 | |||
Dual-Scoring Matrix | 56 | |||
Credit Scoring Model Development | 56 | |||
Basel Considerations Regarding Credit Scoring | 58 | |||
Validation | 58 | |||
Cut-off Score | 61 | |||
Validation Charts and Calibration | 61 | |||
Overrides | 62 | |||
Credit Scoring Model Limitations | 63 | |||
Automated Valuation Models | 64 | |||
Summary of Examination Goals – Scoring and Modeling | 64 | |||
IX. | Portfolio Management 329k | |||
Risk Management | 66 | |||
Account Management Guidance | 67 | |||
Account Management | 67 | |||
Scoring | 69 | |||
Minimum Payments and Negative Amortization | 69 | |||
Payment Deferral Programs | 72 | |||
Pre-Payment Programs | 72 | |||
Credit Line Management | 73 | |||
Initial Credit Line Assignment | 73 | |||
Credit Limit Increases | 73 | |||
Credit Limit Decreases | 74 | |||
Multiple Credit Lines | 75 | |||
Authorizations | 75 | |||
Renewals | 76 | |||
Customer Service | 76 | |||
Consumer Complaints and Litigation | 76 | |||
Closures and Retention | 76 | |||
Collections (General) | 77 | |||
Over-limit Accounts | 78 | |||
Delinquent Accounts | 80 | |||
Partial Payments | 81 | |||
Non-Accrual | 82 | |||
Re-aging | 82 | |||
Re-pricing | 84 | |||
Repayment Plans | 85 | |||
Workout Programs | 85 | |||
Temporary Hardship Plans | 86 | |||
Consumer Credit Counseling Service (CCCS) Plans | 86 | |||
Settlement Agreements | 86 | |||
Charge-offs | 87 | |||
Post-Mortem | 88 | |||
Recoveries | 88 | |||
Fraud | 89 | |||
Reporting and Tracking | 89 | |||
Segmenting | 90 | |||
Dollars and Units | 90 | |||
Levels, Trends, and Performance | 91 | |||
Key Indices | 91 | |||
Projected Versus Actual Performance | 91 | |||
Peer Comparisons | 91 | |||
Ownership and Clarifying Information | 91 | |||
Common Reports | 91 | |||
Summary of Examination Goals – Portfolio Management | 94 | |||
X. | Transaction Testing 75k | |||
Reasons for Conducting Transaction Testing | 96 | |||
Testing Methods | 96 | |||
Judgmental | 96 | |||
Statistical | 97 | |||
Sampling Concepts | 97 | |||
Population Selection | 97 | |||
Sample Design and Selection | 98 | |||
Sample Review | 98 | |||
Evaluation and Interpretation of Results | 99 | |||
Summary of Examination Goals – Transaction Testing | 99 | |||
XI. | Adverse Classifications 66k | |||
Delinquency Thresholds | 100 | |||
Examiner Discretion | 101 | |||
Subprime Loans | 102 | |||
Mutually Exclusive Figures | 102 | |||
Special Mention | 103 | |||
Summary of Examination Goals – Adverse Classifications | 103 | |||
XII. | Allowances for Loan Losses 209k | |||
Accounting Guidance | 105 | |||
Regulatory Guidance | 106 | |||
Comparison to Budgeted Losses | 107 | |||
Expectations for Written Allowance Policies | 108 | |||
Methodologies | 108 | |||
Roll-Rate Models | 108 | |||
Average Charge-Off Method | 111 | |||
Vintage Analysis | 111 | |||
Regression Analysis | 112 | |||
Portfolio Liquidation Method (or Payment Turnover Method) | 112 | |||
Considerations to Accompany the Methodology | 112 | |||
Ratio Analysis | 113 | |||
Layering | 114 | |||
Ownership Interests | 114 | |||
Settlements | 114 | |||
Purification and Allowances for Interest and Fees | 114 | |||
Unallocated Allowances | 115 | |||
Allowances for Unfunded Loan Commitments | 115 | |||
Validation | 116 | |||
Summary of Examination Goals – Allowances for Loan Losses | 116 | |||
XIII. | Asset Quality Considerations 52k | |||
Summary of Examination Goals – Asset Quality Considerations | 119 | |||
XIV. | Credit Card Issuing Rent-a-BINs 167k | |||
Rent-a-BIN Models and Structures | 120 | |||
Responsibilities of Bank Management | 121 | |||
Risks | 122 | |||
Legal, Compliance, and Reputation Risks | 122 | |||
Counterparty Risk | 123 | |||
Funding Risk | 123 | |||
Credit Risk | 124 | |||
Operational Risk | 124 | |||
Risk-Mitigating Controls | 124 | |||
Policies | 124 | |||
Due Diligence | 125 | |||
In-House Expertise | 125 | |||
Contracts | 126 | |||
Financial Reporting | 126 | |||
Covenants and Parameters | 127 | |||
Access to Information | 127 | |||
Materials and Program Control | 127 | |||
Settlement Exposure Reserves (Collateral Protection) | 128 | |||
Pricing | 129 | |||
Ability to Terminate Contract | 129 | |||
Audit | 129 | |||
Contingency Planning | 130 | |||
Ability to Cease Authorizations | 130 | |||
Risk Measurement Systems | 131 | |||
Partner's Other Relationships with the Bank | 131 | |||
Capital | 131 | |||
Accounting | 132 | |||
Summary of Examination Goals – Credit Card Issuing Rent-a-BINs | 132 | |||
XV. | Liquidity 99k | |||
Similarities to Other Banks | 134 | |||
Funds Management Policies | 134 | |||
Contingency Funding Plan | 135 | |||
Cash Flows for Credit Card Lending | 135 | |||
Inter-Company Relationships | 136 | |||
Brokered and Rate Sensitive Deposits | 137 | |||
Securitization | 137 | |||
Asset Management | 139 | |||
Funding Concentrations | 139 | |||
Rent-a-BINs | 139 | |||
Summary of Examination Goals - Liquidity | 140 | |||
XVI. | Earnings 115k | |||
Pricing | 141 | |||
Interest and Fee Income | 142 | |||
Noninterest Income | 143 | |||
Interest Expense | 143 | |||
Noninterest Expense | 143 | |||
FAS 91 | 144 | |||
Competition | 144 | |||
Growth Environment | 145 | |||
Management Reporting, Budgeting, and Strategic Planning | 145 | |||
Capital Support | 145 | |||
Quality of Earnings | 146 | |||
Key Financial Indices Concerning Profitability | 146 | |||
Consideration of Securitizations and Issuing Rent-a-BINs | 146 | |||
Summary of Examination Goals - Earnings | 147 | |||
XVII. | Sensitivity to Market Risk 97k | |||
Joint Agency Policy Statement on Interest Rate Risk | 149 | |||
IRR Considerations Specific to Credit Card Lending | 149 | |||
Consumer Behavior | 151 | |||
Minimum Payment Considerations | 151 | |||
Contractual Interest Rate Ceilings and Floors for Adjustable-Rate Items | 151 | |||
Securitization Considerations | 151 | |||
Hedging Strategies and Products | 152 | |||
Summary of Examination Goals – Sensitivity to Market Risk | 152 | |||
XVIII. | Capital 149k | |||
Basel Capital Accords | 153 | |||
Basel II Framework | 153 | |||
IRB Systems for Retail Credit Risk | 154 | |||
Revisions to Basel I | 155 | |||
Assets | 155 | |||
Subprime Credit Card Loans | 156 | |||
Earnings and Dividends | 157 | |||
Funds Management | 157 | |||
Securitization | 158 | |||
Capital Treatment of Recourse Arrangements, Direct Credit Substitutes, and Residual Interests | 158 | |||
Low-Level Recourse Exposure Rule | 159 | |||
Implicit Recourse | 159 | |||
Accrued Interest Receivable (AIR) | 159 | |||
Contingent Liabilities | 160 | |||
Reserving for Rebate Programs | 160 | |||
Quality of Management | 160 | |||
Risk Diversification | 161 | |||
Operating Procedures and Controls | 161 | |||
Capital Models | 161 | |||
Quantitative Measurements | 161 | |||
Summary of Examination Goals – Capital | 162 | |||
XIX. | Merchant Processing 278k | |||
Transaction Process Overview | 164 | |||
Risks Associated with Merchant Processing | 166 | |||
Credit Risk | 167 | |||
Transaction Risk | 167 | |||
Liquidity Risk | 167 | |||
Compliance Risk | 168 | |||
Strategic Risk | 168 | |||
Reputation Risk | 168 | |||
Management | 168 | |||
Capital | 169 | |||
Merchant Underwriting | 170 | |||
Merchant Review and Approval | 170 | |||
Principals | 171 | |||
MATCH | 171 | |||
On-Site Inspection | 171 | |||
Products and Marketing | 171 | |||
Merchant Agreements | 173 | |||
Periodic Review | 173 | |||
Internet Merchants | 173 | |||
Pricing | 174 | |||
Pricing Components | 174 | |||
Discount Rate | 174 | |||
Interchange Fees | 175 | |||
Processing Fees | 175 | |||
ISO/MSP Fees | 175 | |||
Agent Bank Commission | 175 | |||
Other Income | 175 | |||
Monitoring Pricing | 175 | |||
Profitability Analysis | 176 | |||
Fraud Monitoring | 176 | |||
Fraud Detection Methods | 176 | |||
Fraud Investigations | 177 | |||
Charge-back Processing | 178 | |||
Charge-back Transaction Flow | 178 | |||
Charge-back Monitoring | 178 | |||
Risk Mitigation for Charge-backs | 179 | |||
Accounting for Charge-backs | 179 | |||
Acquiring Rent-a-BINs | 179 | |||
Third Parties | 180 | |||
Contractual Considerations | 182 | |||
Association Requirements Regarding Third Parties | 182 | |||
Agent Banks | 183 | |||
Loans to Third-Party Organizations | 184 | |||
Contingency Planning | 184 | |||
Cardholder Information | 184 | |||
Correspondence with the Associations | 184 | |||
Summary of Examination Goals – Merchant Processing | 185 | |||
XX. | Third-party Relationships 125k | |||
Outsourcing | 186 | |||
Risk Considerations | 187 | |||
Due Diligence | 189 | |||
Contracts | 189 | |||
Oversight Program | 191 | |||
Contingency Planning | 191 | |||
Information Security / Safeguarding | 192 | |||
Outsourcing to Foreign Service Providers | 192 | |||
Outsourcing to Affiliated Entities | 192 | |||
Association Requirements | 192 | |||
Examination and Investigation of Unaffiliated Third-Party Servicers | 193 | |||
Affinity, Co-branding, and Corporate Card Arrangements | 193 | |||
Retail Partners | 194 | |||
Summary of Examination Goals – Third-Party Relationships | 194 | |||
XXI. | Glossary 162k | |||
XXII. | Appendices | |||
A. Credit Card Pre-Examination Request List 261k | 209 | |||
B. Merchant Processing Examination Tools 137k | 226 | |||
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