Policies on Loan Chargeoffs, Subprime Lending Expected

Continuing their credit-quality campaign, federal regulators will shortly issue guidance on subprime lending and revise rules for loan chargeoffs.

The subprime guidance is being prepared by the Office of the Comptroller of the Currency and will require national banks to show that they understand the business and know how much risk they are incurring, said Susan R. Eckert, a national bank examiner who is working on the policy.

The subprime guidance will urge banks to:

Research the market before entering it.

Prepare detailed business plans that explicitly state how much risk the bank is willing to incur.

Reassess annually whether it still makes sense to offer subprime loans.

Hire managers with subprime lending experience.

Define in writing the standards for each credit grade. "When grades are not well defined, there is an opportunity for a bank to accept more risk than it intended," she said Friday at a government-sponsored risk- management conference.

Price subprime credit based on risk, rather than on the rates charged by competitors.

Verify income and employment of subprime borrowers.

Analyze the profitability of subprime lending by product, channel, and credit grade. "You should be able to analyze your customers' credit quality over time," she added.

The agency also is warning lenders not to offer borrowers the option of skipping subprime loan payments. These missed payments then are added to the loan balance. "We will criticize that every time," Ms. Eckert said.

The chargeoff policy will be issued by the Federal Financial Institutions Examination Council in several months. The agency has backed away from a controversial proposal requiring banks to charge off consumer loans that are more than 150 days past due, Ms. Eckert said.

Instead the agency will continue permitting banks to write off open- ended loans such as credit cards at 180 days past due and closed-end loans such as mortgages at 120 days past due.

"It looks like this is what will happen," she said.

Industry officials have lobbied hard against the 150-day writeoff period, which was proposed in July. "We feel very strongly that 150 days is too short a period," said James McLaughlin, director of regulatory and trust affairs at the American Bankers Association. Mr. McLaughlin added that it would not give lenders enough time to work out repayment plans with borrowers.

The agencies also will drop an earlier proposal dealing with bankrupt consumers, she said. The agencies had proposed that unsecured loans held by these consumers be written off by the end of the month during which the lender was informed of the bankruptcy.

"There probably will be some type of time period," she said. "But it will be more generous than what is in the current proposal."

The agencies also will make it tougher for banks to reage loans, which means they stop counting the credits as delinquent because the customers have resumed making monthly payments, though they have not paid the arrears.

Banks may not reage loans unless a borrower has made three consecutive payments and the credit has not been reaged within the past 12 months, she said. Also, the lender must document the borrower's willingness to repay, she said.

Despite "cackles" from the industry over this proposal, Ms. Eckert said the agencies plan to adopt it because they fear banks may be reaging loans to defer losses.

The proposal also will require banks to charge off losses involving fraud within 90 days of discovery of the crime. Chargeoffs resulting from the death of a borrower will be realized when the banks incur the loss.

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