Financial Update (April-June 2001)
Subprime Lending Guidance
Agencies Issue Guidance on Subprime Lending
ederal banking regulatory agencies recently issued expanded guidance on the examination and supervision of institutions with significant subprime lending programs.
Typically, subprime lending programs target borrowers with weakened credit characterized by payment delinquencies, charge-offs, judgments or bankruptcies. These programs may also target borrowers with questionable repayment capacity evidenced by low credit scores or high debt-burden ratios. As a result, subprime loans have a higher risk of default than loans to other borrowers.
While responsible subprime lending can expand credit access for consumers and offer institutions the opportunity to earn attractive returns, it can carry with it elevated risk levels for institutions that systematically target the subprime market. The guidance seeks to intensify the examination scrutiny of such institutions, especially those with subprime lending programs that equal or exceed 25 percent of an institution’s tier 1 regulatory capital.
The guidance is designed to stress the enhanced risk management standards needed to successfully engage in subprime lending and to make banks and thrifts fully aware of supervisory expectations regarding risk management processes. It includes information on
The guidance on subprime lending was distributed to banks and thrifts by the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
The supervisory letter and guidance are available at www.federalreserve.gov/boarddocs/press/boardacts/2001/20010131.