Banking and thrift regulators said Friday that they plan to overhaul rules governing loan chargeoffs, particularly in the area of consumer credit.
The Federal Financial Institutions Examination Council did not include specific measures in its Sept. 12 Federal Register notice. Instead it asked the industry for recommendations on how to revamp consumer credit and home equity chargeoff proposals.
"We want to know what the industry thinks is reasonable here, and we need to make exams consistent and uniform for all institutions in these areas," said a banking agency official.
Installment credit guidelines, written more than 17 years ago, have become outdated, regulators said. For example, in 1980 open-end credit generally consisted of credit card accounts with small credit lines. As a result, a bank limited its exposure to individual borrowers. Today open-end credit involves accounts with large balances.
Specifically, the exam council asked:
Should the 180-day chargeoff period on open-end and 120-day period on closed-end credit be changed?
Should banks continue to classify open-end and closed-end credit as substandard when the account is 90 days or more delinquent?
If these changes were made, how long would it take for banks to update their computer systems and how much would it cost?
Additionally, the exam council said it wants to add to the rules guidance on bankruptcies, losses from fraudulently obtained loans, and accounts owned by the deceased.
For instance, it asked what event in the bankruptcy process should trigger a loan chargeoff. As possibilities, it suggested the filing date, the date of notification to the creditor by the bankruptcy court of the filing, or the date that the bankruptcy trustee first meets with creditors.
"We are seeing record levels of consumer bankruptcies, but the guidance doesn't address what to do in these situations," said the banking agency official. "Do you wait until the 180th day to recognize the loss when you know person is bankrupt after 30 days?"
Banking industry representatives were wary of the plan, saying any new chargeoff requirements could put them at a competitive disadvantage.
"If our competition has a chargeoff period of 210 days, and we have to do it in 120 days, then they have 90 more days to keep that loan from hitting their bottom line," said Steven A. Bennett, general counsel of Banc One Corp., Columbus, Ohio.
Others said that altering how banks charge off loans could require costly changes to computer systems.
"If it causes a major overhaul in banks' systems without any real benefit to institutions, that's bad," said James D. McLaughlin, the American Bankers Association's director of regulatory and trust affairs. "Uniformity for uniformity's sake isn't good."
The exam council gave the industry until Nov. 12 to suggest changes. The agencies are expected to propose specific changes early next year.