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 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, 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-12-months/twice-in-five-years
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 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.
Issued by the Federal
Financial Institutions Examination Council June 12, 2000 (SR-00-8).
