Financial Update (April-June 2001)


Cover Story

Subprime Lending Guidance

Economics of Checks

Greenspan on Lending

Retail Banking Fees

ATM Fee Disclosure


Did You Know?

Data Bank

The Docket

Agencies Issue Guidance on Subprime Lending

Picture of House

Federal 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 characteristics of a subprime lending program;
  • a set of borrower characteristics that may indicate an institution is involved in the subprime lending market;
  • analysis and documentation standards for the allowance for loan and lease losses;
  • factors to be considered when determining the appropriate level of capital needed to support subprime lending;
  • a discussion of examination procedures for assessing the quality of subprime loan portfolios; and
  • a list of potentially predatory or abusive lending practices that safety and soundness examiners would criticize.

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