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FIL-40-2000 Attachment

[Federal Register: June 12, 2000 (Volume 65, Number 113)]

[Notices]

[Page 36903-36906]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr12jn00-100]


 

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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL


 

 

Uniform Retail Credit Classification and Account Management

Policy


 

AGENCY: Federal Financial Institutions Examination Council.


 

ACTION: Final notice.


 

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SUMMARY: The Federal Financial Institutions Examination Council

(FFIEC), on behalf of the Board of Governors of the Federal Reserve

System (FRB), the Federal Deposit Insurance Corporation (FDIC), the

Office of the Comptroller of the Currency (OCC), and the Office of

Thrift Supervision (OTS), collectively referred to as the Agencies, is

publishing revisions to the Uniform Retail Credit Classification and

Account Management Policy, to clarify certain provisions, especially

regarding the re-aging of open-end accounts and extensions, deferrals,

renewals, and rewrites of closed-end loans. The National Credit Union

Administration (NCUA), also a member of FFIEC, does not plan to adopt

the Uniform Policy at this time. This Policy is a supervisory policy

used by the Agencies for uniform classification and treatment of retail

credit loans in financial institutions.


 

DATES: Any changes to an institution's policies and procedures as a

result of the Uniform Retail Credit Classification and Account

Management Policy issued on February 10, 1999, as modified by these

revisions, should be implemented for reporting in the December 31,

2000, Call Report or Thrift Financial Report, as appropriate.


 

FOR FURTHER INFORMATION CONTACT:

FRB: David Adkins, Supervisory Financial Analyst, (202) 452-5259,

or Anna Lee Hewko, Financial Analyst, (202) 530-6260, Division of

Banking Supervision and Regulation, Board of Governors of the Federal

Reserve System. For the hearing impaired only, Telecommunication Device

for the Deaf (TDD), Diane Jenkins, (202) 452-3544, Board of Governors

of the Federal Reserve System, 20th and C Streets, N.W., Washington,

D.C. 20551.

OCC: Daniel L. Pearson, National Bank Examiner, (202) 874-5170,

Credit Risk Division, or Ron Shimabukuro, Senior Attorney, (202) 874-

5090, Legislative and Regulatory Activities Division, Chief Counsel's

Office, Office of the Comptroller of the Currency, 250 E Street, SW.,

Washington, DC 20219.

FDIC: James Leitner, Examination Specialist, (202) 898-6790,

Division of Supervision, or Michael Phillips, Counsel, (202) 898-3581,

Supervision and Legislation Branch, Legal Division, Federal Deposit

Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.

OTS: William J. Magrini, Senior Project Manager, (202) 906-5744,

Donna M. Deale, Manager, Supervision Policy, (202) 906-7488,

Supervision Policy, or Ellen J. Sazzman, Counsel (Banking and Finance),

(202) 906-7133, Regulations and Legislation Division, Chief Counsel's

Office, Office of Thrift Supervision, 1700 G Street, N.W., Washington,

D.C. 20552.


 

SUPPLEMENTARY INFORMATION:


 

Background Information


 

On June 30, 1980, the FRB, FDIC, and OCC adopted the Uniform Policy

for Classification of Consumer Installment Credit Based on Delinquency

Status (1980 policy). The Federal Home Loan Bank Board, the predecessor

of the OTS, adopted the 1980 policy in 1987. The 1980 policy

established uniform guidelines for the classification of retail

installment credit based on delinquency status and provided charge-off

time frames for open-end and closed-end credit.

The Agencies undertook a review of the 1980 policy as part of their

review of all written policies mandated by Section 303(a) of the Riegle

Community Development and Regulatory Improvement Act of 1994. As a

result of this review, on February 10, 1999 (64 FR 6655), the Agencies

issued the Uniform Retail Credit Classification and Account Management

Policy (Uniform Policy). In general, the Uniform Policy:

Established a charge-off policy for open-end credit at 180

days delinquency and closed-end credit at 120 days delinquency.

Provided guidance for loans affected by bankruptcy, fraud,

and death.

Established guidelines for re-aging, extending, deferring,

or rewriting past due accounts.

Provided for classification of certain delinquent

residential mortgage and home equity loans.

Provided an alternative method of recognizing partial

payments.

As issued on February 10, 1999, the Uniform Policy was effective

for manual adjustments to an institution's policies and procedures as

of the June 30, 1999, Call Report or Thrift Financial Report, as

appropriate. In addition, the Uniform Policy allowed institutions until

the December 31, 2000, Reports to make changes involving computer

programming resources. In a modification issued on November 23, 1999

(64 FR 65712), the implementation date for manual changes was extended

to the December 31, 2000, Reports.

Following the issuance of the Uniform Policy, the Agencies received

numerous inquiries for clarifications of the standards contained in the

Policy, especially with respect to the re-aging of open-end accounts

and extensions, deferrals, renewals, or rewrites of closed-end loans.

In response to these inquiries for clarification, the Agencies have

decided to publish this revised Uniform Policy. In addition to various

editorial changes, the Agencies have changed the Uniform Policy to

clarify various items in the Uniform Policy with respect to (1) the re-

aging of open-end accounts; (2) extensions, deferrals, renewals, and

rewrites of closed-end loans; (3) examiner considerations; and (4) the

treatment of specific categories of retail loans.

1. Re-aging of open-end accounts. The Uniform Policy provided that

open-end accounts should not be re-aged more than once within any

twelve-month period and no more than twice within any five-year period.

The Agencies have decided to clarify the Uniform Policy by stating that

institutions may adopt a more conservative re-aging standard (e.g.,

some institutions allow only one re-aging in the lifetime of an open-

end account). In addition, this modification of the Uniform Policy

recognizes the importance of formal workout programs and provides

guidance on the handling of open-end accounts that enter into this type

of program.

Specifically, the Agencies have modified the Uniform Policy to

provide that institutions may re-age an account after it enters a

workout program, including internal and third-party debt counseling

services, but only after receipt of at least three consecutive minimum

monthly payments or the equivalent cumulative amount. Re-aging for

workout program purposes is limited to once in a five-year period and

is in addition to the once-in-twelve-months/twice-in-five-years

limitation. The term ``re-age'' is defined in the document (in footnote

3) to mean ``returning a delinquent, open-end account to current status

without collecting the total amount of principal, interest, and fees

that are contractually due.'' In the Agencies' view, management

information systems should track the principal reductions and charge-

off history of loans in workout programs by type of program.


 

[[Page 36904]]


 

2. Extensions, deferrals, renewals, and rewrites of closed-end

loans. The Agencies have modified the Uniform Policy to provide that

institutions should adopt and adhere to explicit standards that control

the use of extensions, deferrals, renewals, and rewrites of closed-end

loans. Such standards would be based on the borrower's willingness and

ability to repay the loan and would limit number and frequency of such

treatment of closed-end loans. The Agencies have also defined the terms

``extension,'' ``deferral,'' ``renewal,'' and ``rewrite.''

This modification of the Uniform Policy states that institutions

should adopt standards that prohibit additional advances that finance

the unpaid interest and fees. The Agencies have added guidance that

comprehensive and effective risk management, reporting, and internal

controls be established and maintained to support the collection

process and to ensure timely recognition of losses.

3. Examination considerations. The Agencies have added guidance

that an examiner may classify retail portfolios, or segments thereof,

where underwriting standards are weak and present unreasonable credit

risk and may criticize account management practices that are deficient.

Adoption of the Uniform Policy may affect an institution's timing

and measurement of probable loan losses that have been incurred. As a

result of changes the Uniform Policy made to the 1980 policy, an

institution may need to adjust its loan loss allowance to reflect any

shortening in its time frame for recording charge-offs. Moreover, a

larger allowance may be necessary if an institution's charge-off

practices are different than the new guidelines for accounts of

deceased persons and accounts of borrowers in bankruptcy.

4. Treatment of specific categories of retail loans. These

modifications to the Uniform Policy clarified the Policy's treatment of

various categories of retail loans:

Regarding retail loans that are due to be charged off, in

lieu of charging off the entire loan balance, loans with non-real

estate collateral may be written down to the value of the collateral,

less cost to sell, if repossession of collateral is assured and in

process.

For open- and closed-end loans secured by one-to four-

family residential real estate, a current assessment of value should be

made no later than 180 days past due, and any outstanding loan balance

in excess of the value of the property, less cost to sell, should be

charged off. The Agencies removed the condition in the Uniform Policy

that such assessment would be required when a residential or home

equity loan is 120 days past due.

Loans in bankruptcy with collateral may be written down to

the value of the collateral, less cost to sell.

As modified, the Uniform Policy now reads as follows:


 

Uniform Retail Credit Classification and Account Management Policy

\1\

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\1\ The agencies' classifications used for retail credit are

Substandard, Doubtful, and Loss. These are defined as follows:

Substandard: An asset classified Substandard is protected

inadequately by the current net worth and paying capacity of the

obligor, or by the collateral pledged, if any. Assets so classified

must have a well-defined weakness or weaknesses that jeopardize the

liquidation of the debt. They are characterized by the distinct

possibility that the institution will sustain some loss if the

deficiencies are not corrected. Doubtful: An asset classified

Doubtful has all the weaknesses inherent in one classified

Substandard with the added characteristic that the weaknesses make

collection or liquidation in full, on the basis of currently

existing facts, conditions, and values, highly questionable and

improbable. Loss: An asset, or portion thereof, classified Loss is

considered uncollectible, and of such little value that its

continuance on the books is not warranted. This classification does

not mean that the asset has absolutely no recovery or salvage value;

rather, it is not practical or desirable to defer writing off an

essentially worthless asset (or portion thereof), even though

partial recovery may occur in the future.

Although the Board of Governors of the Federal Reserve System,

Federal Deposit Insurance Corporation, Office of the Comptroller of

the Currency, and Office of Thrift Supervision do not require

institutions to adopt identical classification definitions,

institutions should classify their assets using a system that can be

easily reconciled with the regulatory classification system.

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The Uniform Retail Credit Classification and Account Management

Policy establishes standards for the classification and treatment of

retail credit in financial institutions. Retail credit consists of

open- and closed-end credit extended to individuals for household,

family, and other personal expenditures, and includes consumer loans

and credit cards. For purposes of this policy, retail credit also

includes loans to individuals secured by their personal residence,

including first mortgage, home equity, and home improvement loans.

Because a retail credit portfolio generally consists of a large number

of relatively small-balance loans, evaluating the quality of the retail

credit portfolio on a loan-by-loan basis is inefficient and burdensome

for the institution being examined and for examiners.

Actual credit losses on individual retail credits should be

recorded when the institution becomes aware of the loss, but in no case

should the charge-off exceed the time frames stated in this policy.

This policy does not preclude an institution from adopting a more

conservative internal policy. Based on collection experience, when a

portfolio's history reflects high losses and low recoveries, more

conservative standards are appropriate and necessary.

The quality of retail credit is best indicated by the repayment

performance of individual borrowers. Therefore, in general, retail

credit should be classified based on the following criteria:

Open- and closed-end retail loans past due 90 cumulative

days from the contractual due date should be classified Substandard.

Closed-end retail loans that become past due 120

cumulative days and open-end retail loans that become past due 180

cumulative days from the contractual due date should be classified Loss

and charged off.\2\ In lieu of charging off the entire loan balance,

loans with non-real estate collateral may be written down to the value

of the collateral, less cost to sell, if repossession of collateral is

assured and in process.

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\2\ For operational purposes, whenever a charge-off is necessary

under this policy, it should be taken no later than the end of the

month in which the applicable time period elapses. Any full payment

received after the 120- or 180-day charge-off threshold, but before

month-end charge-off, may be considered in determining whether the

charge-off remains appropriate.

OTS regulation 12 CFR 560.160(b) allows savings institutions to

establish adequate (specific) valuation allowances for assets

classified Loss in lieu of charge-offs.

Open-end retail accounts that are placed on a fixed repayment

schedule should follow the charge-off time frame for closed-end

loans.

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One- to four-family residential real estate loans and home

equity loans that are past due 90 days or more with loan-to-value

ratios greater than 60 percent should be classified Substandard.

Properly secured residential real estate loans with loan-to-value

ratios equal to or less than 60 percent are generally not classified

based solely on delinquency status. Home equity loans to the same

borrower at the same institution as the senior mortgage loan with a

combined loan-to-value ratio equal to or less than 60 percent need not

be classified. However, home equity loans where the institution does

not hold the senior mortgage, that are past due 90 days or more should

be classified Substandard, even if the loan-to-value ratio is equal to,

or less than, 60 percent.

For open- and closed-end loans secured by residential real estate,

a current assessment of value should be made no later than 180 days

past due. Any outstanding loan balance in excess of the value of the

property, less cost to sell, should be classified Loss and charged off.

Loans in bankruptcy should be classified Loss and charged

off within


 

[[Page 36905]]


 

60 days of receipt of notification of filing from the bankruptcy court

or within the time frames specified in this classification policy,

whichever is shorter, unless the institution can clearly demonstrate

and document that repayment is likely to occur. Loans with collateral

may be written down to the value of the collateral, less cost to sell.

Any loan balance not charged off should be classified Substandard until

the borrower re-establishes the ability and willingness to repay for a

period of at least six months.

Fraudulent loans should be classified Loss and charged off

no later than 90 days of discovery or within the time frames adopted in

this classification policy, whichever is shorter.

Loans of deceased persons should be classified Loss and

charged off when the loss is determined or within the time frames

adopted in this classification policy, whichever is shorter.


 

Other Considerations for Classification


 

If an institution can clearly document that a past due loan is well

secured and in the process of collection, such that collection will

occur regardless of delinquency status, then the loan need not be

classified. A well-secured loan is collateralized by a perfected

security interest in, or pledges of, real or personal property,

including securities with an estimable value, less cost to sell,

sufficient to recover the recorded investment in the loan, as well as a

reasonable return on that amount. In the process of collection means

that either a collection effort or legal action is proceeding and is

reasonably expected to result in recovery of the loan balance or its

restoration to a current status, generally within the next 90 days.


 

Partial Payments on Open-and Closed-End Credit


 

Institutions should use one of two methods to recognize partial

payments. A payment equivalent to 90 percent or more of the contractual

payment may be considered a full payment in computing past due status.

Alternatively, the institution may aggregate payments and give credit

for any partial payment received. For example, if a regular installment

payment is $300 and the borrower makes payments of only $150 per month

for a six-month period, the loan would be $900 ($150 shortage times six

payments), or three full months past due. An institution may use either

or both methods in its portfolio, but may not use both methods

simultaneously with a single loan.


 

Re-Aging, Extensions, Deferrals, Renewals, and Rewrites \3\

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\3\ These terms are defined as follows. Reage: Returning a

delinquent, open-end account to current status without collecting

the total amount of principal, interest, and fees that are

contractually due. Extension: Extending monthly payments on a

closed-end loan and rolling back the maturity by the number of

months extended. The account is shown current upon granting the

extension. If extension fees are assessed, they should be collected

at the time of the extension and not added to the balance of the

loan. Deferral: Deferring a contractually due payment on a closed-

end loan without affecting the other terms, including maturity, of

the loan. The account is shown current upon granting the deferral.

Renewal: Underwriting a matured, closed-end loan generally at its

outstanding principal amount and on similar terms. Rewrite:

Underwriting an existing loan by significantly changing its terms,

including payment amounts, interest rates, amortization schedules,

or its final maturity.

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Re-aging of open-end accounts, and extensions, deferrals, renewals,

and rewrites of closed-end loans can be used to help borrowers overcome

temporary financial difficulties, such as loss of job, medical

emergency, or change in family circumstances like loss of a family

member. A permissive policy on re-agings, extensions, deferrals,

renewals, or rewrites can cloud the true performance and delinquency

status of the portfolio. However, prudent use is acceptable when it is

based on a renewed willingness and ability to repay the loan, and when

it is structured and controlled in accordance with sound internal

policies.

Management should ensure that comprehensive and effective risk

management and internal controls are established and maintained so that

re-ages, extensions, deferrals, renewals, and rewrites can be

adequately controlled and monitored by management and verified by

examiners. The decision to re-age, extend, defer, renew, or rewrite a

loan, like any other modification of contractual terms, should be

supported in the institution's management information systems. Adequate

management information systems usually identify and document any loan

that is re-aged, extended, deferred, renewed, or rewritten, including

the number of times such action has been taken. Documentation normally

shows that the institution's personnel communicated with the borrower,

the borrower agreed to pay the loan in full, and the borrower has the

ability to repay the loan. To be effective, management information

systems should also monitor and track the volume and performance of

loans that have been re-aged, extended, deferred, renewed, or rewritten

and/or placed in a workout program.


 

Open-End Accounts


 

Institutions that re-age open-end accounts should establish a

reasonable written policy and adhere to it. To be considered for re-

aging, an account should exhibit the following:

The borrower has demonstrated a renewed willingness and

ability to repay the loan.

The account has existed for at least nine months.

The borrower has made at least three consecutive minimum

monthly payments or the equivalent cumulative amount. Funds may not be

advanced by the institution for this purpose.

Open-end accounts should not be re-aged more than once within any

twelve-month period and no more than twice within any five-year period.

Institutions may adopt a more conservative re-aging standard; for

example, some institutions allow only one re-aging in the lifetime of

an open-end account. Additionally, an over-limit account may be re-aged

at its outstanding balance (including the over-limit balance, interest,

and fees), provided that no new credit is extended to the borrower

until the balance falls below the predelinquency credit limit.

Institutions may re-age an account after it enters a workout

program, including internal and third-party debt counseling services,

but only after receipt of at least three consecutive minimum monthly

payments or the equivalent cumulative amount, as agreed upon under the

workout or debt management program. Re-aging for workout purposes is

limited to once in a five-year period and is in addition to the once in

twelve-months/twice in five-year limitation described above. To be

effective, management information systems should track the principal

reductions and charge-off history of loans in workout programs by type

of program.


 

Closed-End Loans


 

Institutions should adopt and adhere to explicit standards that

control the use of extensions, deferrals, renewals, and rewrites of

closed-end loans. The standards should exhibit the following:

The borrower should show a renewed willingness and ability

to repay the loan.

The standards should limit the number and frequency of

extensions, deferrals, renewals, and rewrites.

Additional advances to finance unpaid interest and fees

should be prohibited.

Management should ensure that comprehensive and effective risk

management, reporting, and internal controls are established and

maintained


 

[[Page 36906]]


 

to support the collection process and to ensure timely recognition of

losses. To be effective, management information systems should track

the subsequent principal reductions and charge-off history of loans

that have been granted an extension, deferral, renewal, or rewrite.


 

Examination Considerations


 

Examiners should ensure that institutions adhere to this policy.

Nevertheless, there may be instances that warrant exceptions to the

general classification policy. Loans need not be classified if the

institution can document clearly that repayment will occur irrespective

of delinquency status. Examples might include loans well secured by

marketable collateral and in the process of collection, loans for which

claims are filed against solvent estates, and loans supported by valid

insurance claims.

The Uniform Classification and Account Management policy does not

preclude examiners from classifying individual retail credit loans that

exhibit signs of credit weakness regardless of delinquency status.

Similarly, an examiner may also classify retail portfolios, or segments

thereof, where underwriting standards are weak and present unreasonable

credit risk, and may criticize account management practices that are

deficient.

In addition to reviewing loan classifications, the examiner should

ensure that the institution's allowance for loan and lease losses

provides adequate coverage for probable losses inherent in the

portfolio. Sound risk and account management systems, including a

prudent retail credit lending policy, measures to ensure and monitor

adherence to stated policy, and detailed operating procedures, should

also be implemented. Internal controls should be in place to ensure

that the policy is followed. Institutions that lack sound policies or

fail to implement or effectively adhere to established policies will be

subject to criticism.


 

Implementation


 

This policy should be fully implemented for reporting in the

December 31, 2000 Call Report or Thrift Financial Report, as

appropriate.



 

Dated: June 6, 2000.

Keith J. Todd,

Executive Secretary, Federal Financial Institutions Examination

Council.

[FR Doc. 00-14704 Filed 6-9-00; 8:45 am]

BILLING CODE 6210-01-P (25%) 6714-01-P (25%) 6720-01-P (25%) 4810-33-P

(25%)

Last Updated: March 24, 2024