Revised Uniform Retail Credit Classification and Account Management Policy

ATTACHMENT

FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL

Uniform Retail Credit Classification and Account Management Policy

AGENCY: Federal Financial Institutions Examination Council

ACTION: Final notice

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

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, S.W.,

Washington, D.C. 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

2

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

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

orts.

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.

3

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

tutions 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.

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

ternal 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:

4

• 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

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 Policy1

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

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

preclude an institution from adopting a more conservative

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.

ur 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.

5

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 with a combined loan-to-

value ratio equal to or less than 60 percent need not be classified

0 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 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.

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

t 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.

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.

6

• 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

s 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 Rewrites3

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

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 institutionZs management information systems.

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.

fecting 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.

7

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

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 to support the collection process and to

ensure timely recognition of losses. To be effective, management information systems should

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 should

8

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

llowance 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 Todd

Executive Secretary, Federal Financial Institutions Examination Council