Warning that consumer credit quality is deteriorating, acting Comptroller of the Currency Julie L. Williams urged banks Monday to reevaluate their home equity and subprime loan programs.

"Consumer loans in the next downturn may prove to be something other than the safe haven that they have been in the past," she told bankers attending the American Bankers Association's annual convention here. "That's a possibility that should concern all bankers."

This was the first consumer credit warning from a senior regulator in nearly two years, when red flags were waved over credit card lending. Most of the recent focus has been on deteriorating commercial credit standards.

Ms. Williams said she is "troubled" that loan-loss reserves as a percent of loans are falling even as underwriting standards slip. "It causes you to wonder if reserves should continue to shrink," she said.

Consumer debt outstanding has risen 50% since 1993, debt as a percent of personal income is at record levels, and nearly 1.4 million people will file for bankruptcy this year, she said.

"No one wins when individuals receive too much credit or credit they cannot afford," she said. "No one wins when a consumer falls behind or declares personal bankruptcy or loses a home to foreclosure. And ultimately no one wins when, in the name of competition, a bank makes a loan that is not priced fairly."

More consumers are using home equity loans to consolidate credit card debt. Yet Ms. Williams said they are reloading their credit cards with more purchases, leaving them financially worse off then before. Compounding the problem, banks have stopped looking at whether borrowers are able to repay and instead are examining whether the value of the home is enough to cover the loan, she said.

"Given the high costs of foreclosure and remarketing, that portion of any mortgage loan, first or second, that exceeds 85% to 90% of the home's appraised value is tantamount to unsecured credit at secured prices-a bargain no sensible banker should accept," she said.

Ms. Williams also criticized banks that make subprime loans that exceed the value of a consumer's home. "Hundred-and-twenty-five-percent LTV loans to subprime borrowers make no sense," she said. "Neither does pricing that fails to cover the additional risks these loans entail."

Bankers interviewed at the convention agreed that consumer credit quality is declining. "This is an industry problem," said Larry Coy, president and CEO of Community Bank, Bristow, Okla. "It is something we have to deal with."

"Credit for people in debt has gotten too easy to get," said Donald R. Mengedoth, president and CEO of Community First Bankshares, Fargo, N.D.

But ABA chief economist James Chessen, noting a record low in noncurrent loans, said the industry's excellent performance is being distorted by regulators' repeated credit quality warnings. "The industry is extraordinarily healthy today, but you're not hearing that," he said.

Also at the convention, Federal Deposit Insurance Corp. Chairman Donna Tanoue said the agency will try to discourage excessive risk-taking by banks by charging them more for the government's backing.

"The large majority of banks operate in a way that would allow them to survive extremely adverse conditions," Ms. Tanoue said Sunday. "Some banks, however, engage in practices that jeopardize their survival when confronted with the normal ebb and flow of economic growth. We should provide them with a financial incentive to improve their practices."

Ms. Tanoue said the FDIC staff is reviewing the risk-based premium system to ensure that "banks whose condition is good but whose practices make them outliers in terms of underwriting, concentration of risk, or undisciplined growth" pay higher premiums than their more conservative peers.

In an interview after the speech, an FDIC official said a bank may be required to pay higher insurance premiums if it has a weakness in a specific component or subcomponent of the Camels rating, even if that problem is not severe enough to affect the institution's overall supervisory grade. Camels, a key measure of a banks' health, stands for capital, asset quality, management, earnings, liquidity, and sensitivity to risk.

Under the FDIC proposal, a bank with an overall Camels rating of 2 could have trouble managing its subprime lending portfolio. Those difficulties may not be enough to affect the overall asset, management, or sensitivity- to-risk grades, yet could result in a higher insurance premium under the proposed new system, the official said.

Ms. Tanoue also used her speech to assure the public that the FDIC will protect insured deposits at banks that collapse because they are not year- 2000 compliant. "If a bank or thrift institution should fail because of year-2000 problems, insured deposits will be covered, no ifs, ands, or buts," Ms. Tanoue said.

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