Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
• No loan should be re-aged, extended, deferred,
renewed, or rewritten more than once within any
twelve-month period; that is, at least twelve months
must have elapsed since a prior re-aging. In addition,
no loan should be re-aged, extended, deferred,
renewed, or rewritten more than two times within any
five-year period.
• For open-end credit, an over limit account may be reaged
at its outstanding balance (including the over
limit balance, interest, and fees). No new credit may
be extended to the borrower until the balance falls
below the designated predelinquency credit limit.
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. 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, or three full months delinquent.
An institution may use either or both methods in its
portfolio, but may not use both methods simultaneously
with a single loan.
Examination Considerations
Examiners should ensure that institutions adhere to the
Retail Classification 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
regardless 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 valid
insurance claims. Conversely, the Retail Classification
Policy does not preclude examiners from reviewing and
classifying individual large dollar retail credit loans that
exhibit signs of credit weakness regardless of delinquency
status.
In addition to reviewing loan classifications, the examiner
should ensure that the ALLL provides adequate coverage
for inherent losses. Sound risk and account management
systems, including a prudent retail credit lending policy,
measures to ensure and monitor adherence to stated policy,
and detailed operating procedures, should also be
implemented. Internal controls should be in place to ensure
that the policy is followed. Institutions lacking sound
policies or failing to implement or effectively follow
established policies will be subject to criticism.
Examination Treatment
Use of the formula classification approach can result in
numerous small dollar adversely classified items.
Although these classification details are not always
included in the Report of Examination, an itemized list is
to be left with management. A copy of the listing should
also be retained in the examination work papers.
Examiner support packages are available which have built
in parameters of the formula classification policy, and
which generate a listing of delinquent consumer loans to be
classified in accordance with the policy. Use of this
package may expedite the examination in certain cases,
especially in larger banks.
Losses are one of the costs of doing business in consumer
installment credit departments. It is important for the
examiner to give consideration to the amount and severity
of installment loan charge-offs when examining the
department. Excessive loan losses are the product of weak
lending and collection policies and therefore provide a
good indication of the soundness of the consumer
installment loan operation. The examiner should be alert
also to the absence of installment loan charge-offs, which
may indicate that losses are being deferred or concealed
through unwarranted rewrites or extensions.
Dealer lines should be scheduled in the report under the
dealer's name regardless of whether the contracts are
accepted with or without recourse. Any classification or
totaling of the nonrecourse line can be separately identified
from the direct or indirect liability of the dealer.
Comments and format for scheduling the indirect contracts
will be essentially the same as for direct paper. If there is
direct debt, comments will necessarily have to be more
extensive and probably will help form a basis for the
indirect classification.
No general rule can be established as to the proper
application of dealers' reserves to the examiner's
classifications. Such a rule would be impractical because
of the many methods used by banks in setting up such
reserves and the various dealer agreements utilized.
Generally, where the bank is handling a dealer who is not
financially responsible, weak contracts warrant
classification irrespective of any balance in the dealer's
reserve. Fair and reasonable judgment on the part of the
examiner will determine application of dealer reserves.
If the amount involved would have a material impact on
capital, consumer loans should be classified net of
unearned income. Large business-type loans placed in
consumer installment loan departments should receive
Loans (12-04) 3.2-46 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation