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5000 - Statements of Policy
UNIFORM RETAIL CREDIT CLASSIFICATION AND ACCOUNT MANAGEMENT
POLICY 1
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.
• 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
{{6-30-00 p.5082}}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 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
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,
{{6-30-00 p.5083}}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
12-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 to support the collection process and to ensure timely
recognition of losses. To be effective, management information
systems
{{6-30-00 p.5084}}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.
[Source:
65
Fed. Reg. 36904, June 12, 2000]
[The page following this is 5113.]
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
weawknesses 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. Go Back to Text
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. Go Back to Text
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. Go Back to Text
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