New Orleans, LA
Acting Comptroller of the Currency Julie L. Williams said today that retail
lending has undergone a dramatic transformation in recent years and she urged
bankers to respond by altering the way they think about consumer credit and
adopting new approaches to managing it.
It is no longer
possible to assess credit risk accurately by using lagging indicators, such as delinquencies
and losses, when it has become so much easier for consumers to avoid
delinquencies as a result of decreased payment requirements, Ms. Williams said
in a speech before the BAIs National Loan Review Conference.
Because reduced
payment requirements and extended amortization arrangements can mask credit
risk, loan review professionals need to look at it differently in order to
ensure that the risk is defined and managed, Ms. Williams said. That means developing broader, more
discriminating, and more forward looking approaches to measuring and monitoring
risk in the retail portfolio.
Ms. Williams said the
philosophy of retail lending has changed as much as the mechanics.
Today the focus for
lenders is not so much on consumer loans being repaid, but on the loan as a
perpetual earning asset. Thus, today
the challenge for lenders is not so much to control the amount of debt that a
household can take on, but to find ways to accommodate the debt within each
borrowers financial framework. In
other words, its not repayment of the amount of the debt that is the focus,
but rather the income the credit relationship generates through periodic
payments on the loan, associated fees, and cross-selling opportunities.
As a result, Ms.
Williams said, American households are more highly leveraged than ever.
Millions of Americans faithfully make minimum payments each month and make
little progress in reducing their total debt.
The practices
associated with the new philosophy of retail lending - higher credit limits and
loan-to-values, lower minimum payments, more revolving debt, less documentation
and verification, and lengthening amortizations - have certainly introduced
risk elements not previously present in the banking system, Ms. Williams said.
Ms. Williams urged
bankers to look at new ways to measure and monitor risk.
What that entails is
zeroing in on those particular loans that have the highest probability of
default, Ms. Williams said. It means
identifying particularly risky borrowers:
those with unusually high debt levels and utilization of their credit
card lines, and declining credit scores.
It means singling out high LTV loans, loans with extensions, renewals,
and rewrites; and loans in work-out programs.
It means testing transactions to ensure compliance with policies and
procedures. It means evaluating whether
collection practices are effective, loan reserves are appropriate, and losses
are recognized in a timely manner. And
it means doing this constantly, consistently.
Ms. Williams said the
OCC has already incorporated the changes in retail lending in OCC examination
procedures for retail lending issued in December. The goal is to bring OCC supervision into conformity with the
changes in retail lending philosophy and to raise awareness of those changes
throughout the banking industry.
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The Office of the
Comptroller of the Currency was created by Congress to charter national banks,
to oversee a nationwide system of banking institutions, and to assure that
national banks are safe and sound, competitive and profitable, and capable of
serving in the best possible manner the banking needs of their customers.