Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices 36403

FEDERAL FINANCIAL INSTITUTIONS

EXAMINATION COUNCIL

Uniform Retail Credit Classification

Policy

AGENCY: Federal Financial Institutions

Examination Council.

ACTION: Notice and request for comment.

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, requests comment on

proposed changes to the Uniform Policy

for Classification of Consumer

Installment Credit Based on

Delinquency Status (Uniform Retail

Credit Classification Policy). The

National Credit Union Administration

(NCUA), also a member of FFIEC, is

reviewing the applicability and

appropriateness of the FFIEC proposal

for institutions supervised by the

NCUA; however, the NCUA does not

plan to adopt the proposed policy at this

time.

The Uniform Retail Credit

Classification Policy is a supervisory

policy used by the federal regulatory

agencies for the uniform classification of

retail credit loans of financial

institutions. At the time the initial

Uniform Retail Credit Classification

Policy was issued in 1980, open-end

credit generally consisted of credit card

accounts with small credit lines to the

most creditworthy borrowers. Today,

open-end credit generally includes

accounts with much larger lines of

credit to diverse borrowers with a

variety of risk levels. The change in the

nature of those accounts and the

inconsistencies in the reporting and

charging off of accounts has raised

concerns with the FFIEC. This proposed

policy statement is intended to help the

FFIEC develop a revised classification

policy to more accurately reflect the

changing nature of risk in today’s retail

credit environment. The FFIEC is

proposing to revise the charge-off policy

for closed-end and open-end credit and

address other significant issues in retail

credit lending by the financial services

industry. The FFIEC is requesting

comment on the proposed revision and

the listed issues.

DATES: Comments must be received by

September 4, 1998.

ADDRESSES: Comments should be sent to

Keith Todd, Acting Executive Secretary,

Federal Financial Institutions

Examination Council, 2100

Pennsylvania Avenue NW., Suite 200,

Washington, DC 20037, or by facsimile

transmission to (202) 634–6556.

FOR FURTHER INFORMATION CONTACT:

FRB: William Coen, Supervisory

Financial Analyst, (202) 452–5219,

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), Dorothea

Thompson, (202) 452-3544, Board of

Governors of the Federal Reserve

System, 20th and C Streets NW.,

Washington, DC 20551.

FDIC: James Leitner, Examination

Specialist, (202) 898–6790, Division of

Supervision. For legal issues, Michael

Phillips, Counsel, (202) 898–3581,

Supervision and Legislation Branch,

Federal Deposit Insurance Corporation,

550 17th Street NW., Washington, DC

20429.

OCC: Cathy Young, National Bank

Examiner, Credit Risk Division, (202)

874–4474, or Ron Shimabukuro, Senior

Attorney, Legislative and Regulatory

Activities Division (202) 874–5090,

Office of the Comptroller of the

Currency, 250 E Street SW.,

Washington, DC 20219.

OTS: William J. Magrini, Senior

Project Manager, (202) 906–5744,

Supervision Policy; or Vern McKinley,

Attorney, (202) 906–6241, Regulations

and Legislation Division, Chief

Counsel’s Office, Office of Thrift

Supervision, 1700 G Street NW,

Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background Information

On June 30, 1980, the FRB, FDIC, and

OCC adopted the FFIEC uniform policy

for classification of open-end and

closed-end credit (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 installment credit based

on delinquency status and provided

different charge-off time frames for

open-end and closed-end credit. The

1980 policy recognized the statistical

validity of determining losses based on

past due status. At that time, open-end

credit generally consisted of credit card

accounts with small credit lines to the

most creditworthy borrowers. Today,

open-end credit generally includes

accounts with much larger lines of

credit to diverse borrowers with a

variety of credit risk levels. The change

in the nature of those accounts and the

inconsistencies in the reporting and

charging off of accounts by financial

institutions, has prompted the federal

regulatory agencies to propose several

revisions to the 1980 policy.

Comments Received

The FFIEC requested comment on

September 12, 1997 at 62 FR 48089

(September Notice) on a series of

questions designed to help the FFIEC

develop a revised classification policy.

A total of 61 comments were received

representing the views of 22 banks and

thrifts, nine bank holding companies,

eight regulatory agencies, seven trade

groups, and 15 other companies and

individuals. The following is a summary

of the questions and responses.

1. Charge-off Policy for Open-End and

Closed-End Credit

The September Notice requested

comment on whether a uniform time

frame should be used to charge off both

open-end and closed-end accounts, and

if a change in policy is made, a

reasonable time frame to allow

institutions to comply with such a

change. Comments were also sought on

whether to continue the current

regulatory practice of classifying openend and closed-end credit Substandard

when the account is 90 days or more

delinquent; whether a standard for the

Doubtful classification or guidance for

placing loans on a nonaccrual status

should be adopted; and whether a

specific reserve account should be

established.

Charge off policy: Commenters were

divided on whether to maintain the

current policy of charging off open-end

(credit card) loans at 180 days

delinquent and closed-end installment

loans at 120 days or to change the policy

to a uniform time frame for both types

of loans. Almost half of the commenters

suggested a uniform charge-off time

frame for both types of loans.

Recommendations for the charge-off

time frame varied from 90 days to 180

days; the majority who favored

uniformity believed the time frame

should be less than 180 days. Of 51

comments to this question, 22

commenters preferred a stricter openend standard than what is contained in

the 1980 policy and remaining

respondents supported no change or a

less strict open-end standard.

Commenters in favor of a uniform

time frame cited three main reasons: (1)

inconsistency in the 1980 policy

guidelines; (2) recovery data supports a

lengthening of the charge-off policy for

closed-end installment loans; and (3)

the level of credit risk in open-end and

closed-end loans has changed since the

1980 policy was adopted.
36404 Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

Commenters supporting a uniform

time frame cited the inconsistency

between the level of risk associated with

credit card loans and closed-end credit

and the inconsistency in the 1980 policy

for charging-off delinquent accounts.

Under the 1980 policy, credit card

loans, which generally are unsecured,

are charged off when an account is 180

days delinquent. Conversely, closed-end

credits generally amortize according to

a payment schedule, are better protected

via a security interest in collateral, and

experience much higher recovery rates

after being charged off, but are subject

to a more stringent charge-off policy at

120 days delinquency. Over the years,

the inconsistency in the time frames has

become more apparent as the market for

credit cards evolved. Several

commenters stated that the risk

associated with open-end credit has

increased significantly since 1980. This

is due to competition in solicitations,

less stringent underwriting criteria,

lower minimum payment requirements,

lack of a security interest, and lower

recovery rates after charge-off.

Commenters contended that these

factors provide support for shortening

the current 180 day charge-off time

frame for open-end credit.

A uniform time frame would

eliminate the inconsistent treatment for

closed-end and open-end credit. On a

volume basis, the change would actually

lengthen the charge-off time frame for

more loans than it would shorten. As of

year end 1997, institutions supervised

by the FRB, FDIC, and OCC had closedend installment loans of $338 billion

and open-end credit card loans of $237

billion. At that time, institutions

supervised by the OTS had closed-end

installment loans of $29 billion and

open-end loans totaling $23 billion.

Under a uniform time frame,

institutions would have an additional

month to work with borrowers before

recognizing a loss for lower risk closedend credit. Credit card issuers would

have this same 150-day charge-off time

frame, although it would be 30 days less

than the current requirement.

The most direct measure of credit risk

is the ratio of net losses to loans. In

every year since 1984, the credit card

loss ratio has been much higher than the

closed-end installment loss ratio. During

the fourteen-year period, the average net

loss for credit cards was 3.2 percent

while the average net loss for

installment loans was 0.8 percent. The

percentage of current recoveries to prior

year charge-offs is a ratio that indicates

how timely loans are charged-off. A loss

classification does not mean that the

asset has absolutely no recovery or

salvage value; rather, it means that it is

not practical or desirable to defer

writing off an essentially worthless asset

even though partial recovery may occur

in the future. A high rate of recoveries

may illustrate a conservative charge-off

policy, whereas a low rate may indicate

an unwarranted delay in the recognition

of losses. Since 1985, recoveries for

credit card loans have averaged 19

percent, while recoveries for installment

loans have averaged 34 percent.

Commenters opposed to any change

of the charge-off standards cited four

principal reasons: (1) the impact on the

industry’s earnings and capital; (2) the

effect on credit card securitization

transactions; (3) the limitation of

programming resources because of Year

2000 issues; and (4) impact on

consumers.

Some commenters believed that

changing the charge-off guidelines for

open-end credit may make it more

difficult for lenders to collect from

borrowers. They stated that a change in

the guidelines will result in more

expense for institutions, because of the

need to revise their existing collection

policies and procedures. This can

negatively affect an institution’s

earnings and capital.

Others stated that a change in the

charge-off time frames would affect

credit card securitization transactions.

One commenter mentioned that as of

September 1997, $213 billion, or 40.6

percent of outstanding credit card

receivables, were securitized. Some

commenters believed that any change in

the charge-off policy could trigger

contractual provisions, such as early

amortization or collateral substitution

requirements. This would increase costs

to credit card issuers and limit their

ability to sell securitizations, thus

potentially restricting credit card

lending. Some commenters indicated

that such a change may cause them to

exit the securitization market for years.

Some commenters expressed concern

about the re-programming efforts

needed for a change in the charge-off

policy. This comes at a time when

computer programmer resources are

limited due to Year 2000 efforts.

Finally, some commenters contended

that requiring earlier charge offs will

have an impact on consumers. The

incentives for borrowers to pay and for

banks to invest in collection efforts are

greatest before the charge off has

occurred. One industry association

reported that 34 percent of accounts that

are 120 days delinquent will be made

current before charge off under the 1980

policy. A shorter charge-off time frame

reduces the borrower’s time to cure a

debt. Once charge off occurs, the

customer’s charged-off account is

reported to the credit bureau, further

damaging the customer’s credit rating

and future ability to obtain credit.

Commenters stated that the customer

loses the incentive to pay, further

impacting an institution’s recoveries.

Given the division in comments as to

the appropriate charge-off policy

guidelines, the FFIEC is requesting

comment on two alternative charge-off

standards (only one of these will be

implemented):

• A uniform charge-off time frame for

both open-end and closed-end credit at

150 days delinquency with a proposed

implementation date of January 1, 2001;

or

• Retaining the existing policy of

charging off delinquent closed-end

loans at 120 days and delinquent openend loans at 180 days. If this option is

selected, any changes affected by the

final policy statement would have a

January 1, 1999 implementation date.

Substandard classification policy:

Thirty-six of 41 commenters supported

the practice of classifying open-end and

closed-end loans Substandard at 90 days

delinquency. The majority of

commenters opposed a uniform policy

of classifying loans Doubtful, placing

them on nonaccrual, or setting up

separate reserves in lieu of charging off

a loan. The FFIEC has long felt that

when an account is 90 days past due, it

displays weaknesses warranting

classification and proposes to continue

the policy of classifying open-end and

closed-end loans Substandard at 90 days

delinquency. The FFIEC has decided

not to add guidance for classifying retail

credit Doubtful or placing those loans

on nonaccrual.

2. Bankruptcy, Fraud, and Deceased

Accounts

The September Notice requested

comment on whether there should be

separate guidance for determining: (i)

when an account should be charged off

for bankruptcies under Chapter 7 or 13

of the Federal Bankruptcy Code; (ii) the

event in the bankruptcy process that

should trigger loss recognition; (iii) the

amount of time needed by an institution

to charge off an account after the

bankruptcy event; and (iv) whether, as

an alternative to an immediate charge

off, it would be beneficial to set up a

specific reserve account. Comments also

were sought on the amount of time

needed by an institution to charge off

losses due to fraud or losses on loans to

deceased borrowers.

Bankruptcy: The majority of

commenters, 26 of 40, stated that

separate guidance should not be

developed for bankruptcies under

Chapter 7 or Chapter 13. Many
Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices 36405

commenters stated that charge-off

guidance recognizing bankruptcies

arising from defaults on secured loans

versus bankruptcies arising from

defaults on unsecured is more realistic.

The majority indicated that the

notification date to the creditor from the

bankruptcy court should constitute the

event triggering loss recognition. The

majority also did not believe it should

be necessary to set up a separate

allowance reserve at the time of the

bankruptcy filing.

The FFIEC proposes to add guidance

specifying that unsecured loans for

which the borrower declared

bankruptcy should be charged off by the

end of the month that the creditor

receives notification of filing from the

bankruptcy court. In addition, secured

loans in bankruptcy should be evaluated

for repayment potential and classified

appropriately, within 30 days of

notification of filing from the

bankruptcy court, or within the chargeoff time frames in the classification

policy, whichever is shorter.

The FFIEC is aware that Congress is

in the process of addressing bankruptcy

reform legislation. If legislation is

passed, the FFIEC will review its

proposed bankruptcy guidelines for any

changes that may be necessary as a

result of changes to the bankruptcy

code.

Fraud: Commenters were divided

equally with respect to the time

required to charge off fraudulent loans,

either 30 days or 90 days. The FFIEC

recognized that a fraud investigation

may last more than 30 days. For that

reason, the FFIEC is proposing that

fraudulent retail credit should be

charged off within 90 days of discovery

or within the charge-off time frames

adopted in this classification policy,

whichever is shorter.

Deceased Accounts: The majority of

commenters reported that they needed

150 days to work with the trustee of an

estate to determine the repayment

potential of loans of deceased persons.

The FFIEC recognizes that working with

the trustee or the deceased family may

take months to determine repayment

potential. The FFIEC proposes that retail

credit loans of deceased persons should

be evaluated and charged off when the

loss is determined, or within the chargeoff time frames adopted in this

classification policy, whichever is

shorter.

3. Partial Payments

The September notice requested

comment on whether borrowers should

receive credit for partial payments in

determining delinquency by giving

credit for any payment received and if

this would require significant computer

programming changes. Comments were

sought on other reasonable alternatives

and how payments should be applied.

Comments also were requested about

the need for guidance on fixed payment

programs.

The commenters were divided evenly

between supporting the proposal versus

keeping the existing policy whereby 90

percent of a payment qualifies as a full

payment. Many commented about the

significant programming costs that a

change to the existing policy would

cause. For that reason, the FFIEC is

proposing that institutions be permitted

to choose one of two methods. The first

method retains the current policy of

considering a payment equivalent to 90

percent or more of the contractual

payment to be a full payment in

computing delinquency. The second

method would allow an institution to

aggregate payments and give credit for

any partial payment received; however,

the account should be considered

delinquent until all contractual

payments are received. Whichever

method is chosen, the same method

should be used consistently within the

entire portfolio.

Most commenters did not advocate

additional guidance for fixed payment

programs. Although no specific

language is included in this policy,

when an institution grants interest rate

or principal concessions under a fixed

payment program, and those

concessions are material, the institution

should follow generally accepted

accounting principles (GAAP)

guidelines presented in Financial

Accounting Standards Board (FASB) 15

(Accounting by Debtors and Creditors

for Troubled Debt Restructuring) and

FASB 114 (Accounting by Creditors for

Impairment of a Loan).

4. Re-aging, Extension, Renewal,

Deferral, or Rewrite Policy

The September notice proposed and

requested comment on supervisory

standards for re-aging accounts.

Re-aging is the practice of bringing a

delinquent account current after the

borrower has demonstrated a renewed

willingness and ability to repay the loan

by making some, but not all, past due

payments. A liberal re-aging policy on

credit card accounts, or an extension,

deferral, or rewrite policy on closed-end

credit, can cloud the true performance

and delinquency status of the accounts.

The majority of commenters agreed that

the borrower should show a renewed

willingness and ability to repay, reaging should occur after receipt of three

months consecutive or equivalent lump

sum payments, the account should be

opened for a minimum period of time

before it can be re-aged, and the account

should not be re-aged more than once

per year.

The FFIEC concurred with those

criteria, but decided that additional

guidance on the amount that could be

re-aged, and the number of times the

account could be re-aged in its lifetime

were also needed. The FFIEC proposes

to allow re-aging of delinquent loans,

when it is based on recent, satisfactory

performance by the borrowers and when

it is structured in accordance with the

institution’s prudent internal policies.

Institutions that re-age open-end

accounts or extend, defer, or rewrite

closed-end accounts should establish a

written policy, ensure its

reasonableness, and adhere to it. An

account eligible for re-aging, extension,

deferral, or re-write exhibits the

following:

• The borrower should show a

renewed willingness and ability to

repay the loan.

• The borrower should make at least

three consecutive contractual payments

or the equivalent lump sum payment

(funds may not be advanced by the

institution for this purpose).

• No more than one re-age, extension,

deferral, or rewrite should occur during

any 12 month period.

• The account should exist for at least

12 months before a re-aging, extension,

deferral, or rewrite is allowed.

• No more than two re-agings,

extensions, deferrals, or rewrites should

occur in the lifetime of the account.

• The re-aged balance in the account

should not exceed the predelinquency

credit limit.

• A re-aged, extended, deferred, or

rewritten loan should be documented

adequately.

5. Residential and Home Equity Loans

The September notice requested

comment on whether residential and

home equity loans should be classified

Substandard at a certain delinquency

and whether a collateral evaluation

should be required at a certain

delinquency.

Twenty-eight of 37 commenters

agreed with classifying residential and

home equity loans Substandard when

they are 90 days delinquent. The

proposed policy statement classifies

certain residential and home equity

loans Substandard at 90 days

delinquent. However, the FFIEC

recognizes that delinquent, low loan-tovalue loans (i.e., those loans less than or

equal to 60 percent of the real estate’s

value based on the most current

appraisal or evaluation) possess little

likelihood for loss as they are protected
36406 Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

1The regulatory 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 the identical

classification definitions, institutions should

classify their assets using a system that can be

easily reconciled with the regulatory classification

system.

2The final policy will adopt only one of these

options.

adequately by the real estate. Those

loans will be exempted from the

proposed classification policy. The

FFIEC proposes that, if an institution

holds a first-lien residential real estate

loan and a home equity loan to the same

borrower, and if the combined loan-tovalue ratio exceeds 60 percent, the loans

should be classified as substandard

when both are delinquent more than 90

days. If only the residential real estate

loan is delinquent or if only the home

equity loan is delinquent, only the

delinquent loan is classified

substandard. If the institution only

holds the home equity loan and does

not hold other prior residential

mortgages to the same borrower, and the

loan is delinquent 90 days or more, it

should be classified Substandard.

The majority of commenters

supported a collateral evaluation by the

time the loan is 180 days delinquent.

The proposed policy statement calls for

a current evaluation of the collateral to

be made by the time a residential or

home equity loan is: (1) 150 days past

due, if option one under the charge off

time frames is selected, or (2) 120 days

past due for closed-end credit and 180

days past due for open-end credit, if

option 2 is selected. The outstanding

balance in the loan in excess of fair

value of the collateral, less the cost to

sell, should be classified Loss and the

balance classified Substandard.

6. Need for Additional Retail Credit

Guidance

The September notice requested

comment as to whether additional

supervisory guidance is needed or

would be beneficial. Comments were

also sought as to whether additional

supervisory guidance is needed on the

loan loss reserve for retail credit.

The majority of commenters did not

support any other regulatory guidance.

Any additional guidance on the

allowance for loan and lease loss will be

addressed in other policy statements.

Proposed Revision

The FFIEC drafted a revised policy

statement in consideration of the

comments. The proposed policy

statement will:

• Establish a charge-off policy for

open-end and closed-end credit based

on delinquency under one of two

possible time frames;

• Provide guidance for loans affected

by bankruptcy, fraudulent activity, and

death;

• Establish standards for re-aging,

extending, deferring, or rewriting of past

due accounts;

• Classify certain delinquent

residential mortgage and home equity

loans; and

• Broaden the recognition of partial

payments that qualify as a full payment.

The FFIEC considered the effect of

GAAP on this guidance. GAAP requires

that a loss be recognized promptly for

assets or portions of assets deemed

uncollectible. The FFIEC believes that

this guidance requires prompt

recognition of losses, and therefore, is

consistent with GAAP.

This proposed policy statement, if

adopted, will apply to all regulated

financial institutions and their operating

subsidiaries supervised by the FRB,

FDIC, OCC, and OTS.

The proposed text of the statement is

as follows:

Uniform Retail Credit Classification

Policy 1

Evidence of the quality of consumer

credit soundness is indicated best by the

repayment performance demonstrated

by the borrower. When loans become

seriously delinquent (90 days or more

contractually past due), they display

weaknesses that, if left uncorrected, may

result in a loss. Because retail credit

generally is comprised 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 to the

institution being examined and to

examiners. Therefore, in general, retail

credit should be classified based on the

following criteria:

• [Option 1]: Open-end and closedend retail loans that become past due

150 cumulative days or more from the

contractual due date should be charged

off. The charge off should be effected by

the end of the month in which the

requirement is triggered. Open-end and

closed-end retail loans that are past due

90 days or more, but less than 150

cumulative days, should be classified

Substandard or

• [Option 2]: 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

charged off. The charge off should be

effected by the end of the month in

which the requirement is triggered.

Open-end and closed-end retail loans

that are past due 90 days or more should

be classified Substandard.2

• Unsecured loans for which the

borrower declared bankruptcy should be

charged off by the end of the month in

which the creditor receives notification

of filing from the bankruptcy court, or

within the charge-off time frames

adopted in this classification policy,

whichever is shorter.

• For secured and partially secured

loans in bankruptcy, the collateral and

the institution’s security position in the

bankruptcy court should be evaluated.

Any outstanding investment in the loan

in excess of the fair value of the

collateral, less the cost to sell, should be

charged off within 30 days of

notification of filing from the

bankruptcy court, or within the time

frames in this classification policy,

whichever is shorter. The remainder of

the loan should be classified

Substandard until the borrower reestablishes the ability and willingness to

repay.

• Fraudulent loans should be charged

off within 90 days of discovery, or

within the time frames in this

classification policy, whichever is

shorter.

• Loans of deceased persons should

be charged off when the loss is

determined, or within the time frames

adopted in this classification policy,

whichever is shorter.

• One- to four-family residential real

estate loans and home equity loans that

are delinquent 90 days or more, and

with loan-to-value ratios greater than

60%, should be classified Substandard.

• A current evaluation of the loan’s

collateral should be made by the time a

residential or home equity loan is: (1)

150 days past due if option one under

the charge off time frames is selected or
Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices 36407

(2) 120 days past due for closed-end

credit and 180 days past due for openend credit if option 2 is selected. Any

investment in excess of fair value of the

collateral, less cost to sell, should be

classified Loss and the balance

classified Substandard.

Certain residential real estate loans

with low loan-to-value ratios are exempt

from classification based on

delinquency, although these loans may

be reviewed and classified individually.

Residential real estate loans with a loanto-value ratio equal to, or less than, 60

percent should not be classified based

solely on delinquency status. In

addition, 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, should not be classified.

However, home equity loans where the

institution does not hold the senior

mortgage that are delinquent 90 days or

more should be classified Substandard,

even if the loan-to-value ratio is

reportedly equal to, or less than, 60

percent.

The use of delinquency to classify

retail credit is based on the presumption

that delinquent loans display a serious

weakness or weaknesses that, if

uncorrected, demonstrate the distinct

possibility that the institution will

suffer a loss of either principal or

interest. However, if an institution can

clearly document that the delinquent

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 on, or pledges

of, real or personal property, including

securities, with an estimated fair 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 collection efforts or legal action is

proceeding, and is reasonably expected

to result in recovery of the recorded

investment in the loan or its restoration

to a current status, generally within the

next 90 days.

This policy does not preclude an

institution from adopting an internal

classification policy more conservative

than the one detailed above. It also does

not preclude a regulatory agency from

using the Doubtful classification in

certain situations if a rating more severe

than Substandard is justified. Nor does

it preclude a charge-off sooner when

accounts are recognized as Loss.

Partial Payments on Open-End 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

delinquency. Alternatively, the

institution may aggregate payments and

give credit for any partial payment

received. However, the account should

be considered delinquent until all

contractual payments are 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

delinquent. Whichever method is

chosen, the same method should be

used consistently within the entire

portfolio.

Re-agings, Extensions, Deferrals, or

Rewrites

Re-aging is the practice of bringing a

delinquent account current after the

borrower has demonstrated a renewed

willingness and ability to repay the loan

by making some, but not all, past due

payments. A permissive re-aging policy

on credit card accounts, or an extension,

deferral, or re-write policy on closedend credit, can cloud the true

performance and delinquency status of

the accounts. However, prudent use of

the re-aging policy is acceptable when it

is based on recent, satisfactory

performance and the borrower’s other

positive credit factors and when it is

structured in accordance with the

institution’s internal policies.

Institutions that re-age open-end

accounts, or extend, defer, or re-write

closed-end accounts, should establish a

written policy, ensure its

reasonableness, and adhere to it. An

account eligible for re-aging, extension,

deferral, or rewrite exhibits the

following:

• The borrower should show a

renewed willingness and ability to

repay the loan.

• The borrower should make at least

three consecutive contractual payments

or the equivalent lump sum payment

(funds may not be advanced by the

institution for this purpose).

• No loan should be re-aged,

extended, deferred, or rewritten more

than once within the preceding 12

months.

• The account should exist for at least

12 months before a re-aging, extension,

deferral, or re-write is allowed.

• No more than two re-agings,

extensions, deferrals, or re-writes

should occur in the lifetime of the

account.

• The re-aged balance in the account

should not exceed the predelinquency

credit limit.

• An institution should ensure that a

re-aged, extended, deferred, or rewritten loan meets the agencies’ and

institution’s standards. The institution

should adequately identify, discuss, and

document any account that is re-aged,

extended, deferred, or re-written.

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

insurance.

The uniform classification policy does

not preclude examiners from reviewing

and classifying individual large dollar

retail credit loans, which may or may

not be delinquent, but exhibit signs of

credit weakness.

In addition to loan classification, the

examination should focus on the

institution’s allowance for loan and

lease loss and its risk and account

management systems, including retail

credit lending policy, adherence to

stated policy, and operating procedures.

Internal controls should be in place to

assure that the policy is followed.

Institutions lacking sound policies or

failing to implement or effectively

follow established policies will be

subject to criticism.

Request for Comment

The FFIEC is requesting comments on

all aspects of the proposed policy

statement. In addition, the FFIEC also is

asking for comment on a number of

issues affecting the charge-off policy

and will consider the answers before

developing the final policy statement:

1. What would be the costs and

benefits of the uniform 150 day chargeoff time frame? What would be the costs

and benefits of leaving the policy at the

current 120/180 day charge-off time

frames? The FFIEC welcomes historical

statistical evidence showing the dollars

and percentages of open-end accounts

collected between 120 days delinquency

and 150 days delinquency and between

150 days delinquency and 180 days

delinquency.
36408 Federal Register / Vol. 63, No. 128 / Monday, July 6, 1998 / Notices

2. What will be the effect of the

proposed two time frame charge-off

options on institutions? If possible,

please quantify, in dollar amounts and

percentages (of total operating

expenses), the impact of the proposed

options in the charge-off policy in the

first year of implementation and in

subsequent years for open-end and

closed-end credits on:

(a) gross and net charge-offs;

(b) recoveries;

(c) earnings; and

(d) securitization transactions.

3. What are the expected dollar costs

of reprogramming to implement the first

option (uniform charge-off policy at 150

days past due) and what percentage of

total operating expenses do those

programming dollars represent? Also,

can the programming changes be

completed by the proposed January 1,

2001 implementation date?

4. Please provide any other

information that the FFIEC should

consider in determining the final policy

statement including the optimal

implementation date for the proposed

changes.

Dated: June 30, 1998.

Keith J. Todd,

Acting Executive Secretary, Federal Financial

Institutions Examination Council.

[FR Doc. 98–17782 Filed 7–2–98; 8:45 am]

BILLING CODE 6210–01–P, 25% 6714–01–P, 25% 6720–

01–P, 25% 4810–33–P 25%

FEDERAL RESERVE SYSTEM

Change in Bank Control Notices;

Acquisitions of Shares of Banks or

Bank Holding Companies

The notificants listed below have

applied under the Change in Bank

Control Act (12 U.S.C. 1817(j)) and §

225.41 of the Board’s Regulation Y (12

CFR 225.41) to acquire a bank or bank

holding company. The factors that are

considered in acting on the notices are

set forth in paragraph 7 of the Act (12

U.S.C. 1817(j)(7)).

The notices are available for

immediate inspection at the Federal

Reserve Bank indicated. The notices

also will be available for inspection at

the offices of the Board of Governors.

Interested persons may express their

views in writing to the Reserve Bank

indicated for that notice or to the offices

of the Board of Governors. Comments

must be received not later than July 20,

1998.

A. Federal Reserve Bank of St. Louis

(Randall C. Sumner, Vice President) 411

Locust Street, St. Louis, Missouri 63102-

2034:

1. Keith Ray Loeffler, Allendale,

Illinois; to acquire additional voting

shares of Allendale Bancorp, Inc.,

Allendale, Illinois, and thereby

indirectly acquire First National Bank of

Allendale, Allendale, Illinois.

Board of Governors of the Federal Reserve

System, June 29, 1998.

Robert deV. Frierson,

Associate Secretary of the Board.

[FR Doc. 98–17742 Filed 7-2-98; 8:45 am]

BILLING CODE 6210-01-F

FEDERAL RESERVE SYSTEM

Formations of, Acquisitions by, and

Mergers of Bank Holding Companies

The companies listed in this notice

have applied to the Board for approval,

pursuant to the Bank Holding Company

Act of 1956 (12 U.S.C. 1841 et seq.)

(BHC Act), Regulation Y (12 CFR Part

225), and all other applicable statutes

and regulations to become a bank

holding company and/or to acquire the

assets or the ownership of, control of, or

the power to vote shares of a bank or

bank holding company and all of the

banks and nonbanking companies

owned by the bank holding company,

including the companies listed below.

The applications listed below, as well

as other related filings required by the

Board, are available for immediate

inspection at the Federal Reserve Bank

indicated. The application also will be

available for inspection at the offices of

the Board of Governors. Interested

persons may express their views in

writing on the standards enumerated in

the BHC Act (12 U.S.C. 1842(c)). If the

proposal also involves the acquisition of

a nonbanking company, the review also

includes whether the acquisition of the

nonbanking company complies with the

standards in section 4 of the BHC Act.

Unless otherwise noted, nonbanking

activities will be conducted throughout

the United States.

Unless otherwise noted, comments

regarding each of these applications

must be received at the Reserve Bank

indicated or the offices of the Board of

Governors not later than July 28, 1998.

A. Federal Reserve Bank of Cleveland

(Paul Kaboth, Banking Supervisor) 1455

East Sixth Street, Cleveland, Ohio

44101-2566:

1. FNB Corporation, Hermitage,

Pennsylvania, and Southwest Banks,

Inc.; to merge with Citizens Holding

Corporation, Clearwater, Florida, and

thereby indirectly acquire Citizens Bank

and Trust Company, Clearwater,

Florida.

Board of Governors of the Federal Reserve

System, June 29, 1998.

Robert deV. Frierson,

Associate Secretary of the Board.

[FR Doc. 98–17741 Filed 7-2-98; 8:45 am]

BILLING CODE 6210-01-F

FEDERAL RESERVE SYSTEM

Notice of Proposals to Engage in

Permissible Nonbanking Activities or

to Acquire Companies that are

Engaged in Permissible Nonbanking

Activities

The companies listed in this notice

have given notice under section 4 of the

Bank Holding Company Act (12 U.S.C.

1843) (BHC Act) and Regulation Y, (12

CFR Part 225) to engage de novo, or to

acquire or control voting securities or

assets of a company, including the

companies listed below, that engages

either directly or through a subsidiary or

other company, in a nonbanking activity

that is listed in § 225.28 of Regulation

Y (12 CFR 225.28) or that the Board has

determined by Order to be closely

related to banking and permissible for

bank holding companies. Unless

otherwise noted, these activities will be

conducted throughout the United States.

Each notice is available for inspection

at the Federal Reserve Bank indicated.

The notice also will be available for

inspection at the offices of the Board of

Governors. Interested persons may

express their views in writing on the

question whether the proposal complies

with the standards of section 4 of the

BHC Act.

Unless otherwise noted, comments

regarding the applications must be

received at the Reserve Bank indicated

or the offices of the Board of Governors

not later than July 20, 1998.

A. Federal Reserve Bank of Boston

(Richard Walker, Community Affairs

Officer) 600 Atlantic Avenue, Boston,

Massachusetts 02106-2204:

1. UST Corp., Boston, Massachusetts;

to acquire through Cambridge Trade

Finance Corp., Boston, Massachusetts

certain assets of Cambridge Trading

Services Corporation, Boston,

Massachusetts, and thereby engage in

extending credit and servicing loans,

pursuant to § 225.28(b)(1).

B. Federal Reserve Bank of New York

(Betsy Buttrill White, Senior Vice

President) 33 Liberty Street, New York,

New York 10045-0001:

1. Deutsche Bank AG, Frankfurt,

Main, Federal Republic of Germany; to

acquire Bouclier Vert Limite’ L.L.C. d/

b/a/ Green Shield Limited, L.L.C.,

Woodbury, New Jersey, and thereby

engage in residential mortgage