Federal regulators on Monday issued their harshest warnings yet on subprime lending.

In a letter to all national banks, the Office of the Comptroller of the Currency said that subprime lending "may constitute an unsafe and unsound banking practice" unless an institution has expertise with this market and has sufficient internal controls.

The OCC's action comes just one month after bank regulators released joint guidelines on subprime lending, and it is yet more evidence that supervisors are extremely concerned about this business.

"I think they are really sending a shot across the bow of the industry," said Karen Shaw Petrou, president of ISD/Shaw Inc., a bank consulting firm here. "I found that the interagency guidelines told banks that they view subprime lending as toxic. The OCC guidelines make it radioactive."

Subprime refers to borrowers who pay higher interest rates because they have less-than-perfect credit histories. National banks, eager for new sources of revenue, have been moving aggressively into this market, said David D. Gibbons, the OCC's deputy comptroller for credit risk.

National banks now face more detailed instructions on how to engage in subprime lending than other depository institutions. Mr. Gibbons said that the agency's guidelines were not intended to make life more difficult for national banks, but to provide more detail about what the agency was looking for.

The OCC guidelines are broken down into four main areas: strategic and business planning, policies and procedures, risk management, and internal controls.

For instance, the OCC said banks need to set subprime lending policies without regard to what the competition is doing. "The OCC is concerned by the extent to which some banks have focused on competitors' product design, terms, and pricing, without sufficient consideration of their own strategic plans."

The agency also said banks need to ensure that their subprime activities do not violate fair-lending laws.

To service subprime portfolios, the OCC said, banks should consider calling borrowers within two days of origination to review loan terms and answer questions. Banks should make reminder calls to borrowers before the payment due date and soon after a missed payment, the OCC said.

Repeating a theme stressed last month by Office of Thrift Supervision director Ellen S. Seidman, the OCC said that subprime borrowers should be offered lower interest rates as their credit rating improves.

Automated loan information systems need to be tailored specifically to the risks inherent in subprime lending, the OCC said.

Though subprime loans generate higher interest rates, banks need to consider whether they are making large enough provisions for defaults, the OCC said.

The OCC also issued updated guidelines for examiners. The OTS and the Federal Deposit Insurance Corp. are planning similar examiner guidance. The Federal Reserve Board is not planning additional guidelines.

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