Financial Update (Third Quarter 2005)



FEATURES

 Pat Barron on
 Payment System
 Changes

 Overdraft Protection
 Information Changes

 Subprime Mortgagees
 May Face More Risk

 Atlanta Fed Hosts
 Housing Conference

 Atlanta Fed Unveils
 Americas Center
 Site

 Fed Governor
 Addresses Basel II
 Accords

 Fed Alters
 Banks’ Calculations
 of TRUPS

 International Banking
 Journal Debuts

 Fed Makes Cash
 Operation Changes

 Innovating Small
 Firms’ Credit
 Examinations

 New Guidelines
 For Home Equity
 Lenders

DEPARTMENTS

 Data Bank

 Circular Letters

STAFF

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New Guidelines Promote Sound Credit Risk Management

The rapid growth of home equity lending has in some cases outpaced sound credit management practices. To promote sound practices, federal bank, thrift, and credit union regulatory agencies have issued new guidelines to loan issuers.

Related
Press release

Credit risk management guidance

Risks identified
Rising home values, low interest rates, and favorable tax treatment have attracted many homeowners to home equity lines of credit and loans. The modest repayment requirements and relaxed structures of this type of lending have contributed to low delinquency and loss rates for home equity portfolios. But these loans pose a number of risks. Risk factors include
  • vulnerability to interest rate increases;
  • interest-only mortgages that require no payment of principal for a lengthy period;
  • limited or no documentation of a borrower’s assets, employment, and income;
  • issuance of loans for close to a home’s full value (a high loan-to-value ratio);
  • issuance of loans to consumers with high levels of debt relative to their incomes;
  • lenders’ acceptance of lower credit risk scores when underwriting home equity loans;
  • greater use of automated valuation models and other collateral evaluation tools for developing appraisals and evaluations; and
  • an increased number of transactions generated through a loan broker or other third party.

Financial institutions must be vigilant
The regulatory agencies note that active portfolio management is especially important for financial institutions that project or have already experienced significant growth or concentrations in products with higher-risk factors like those listed above. The guidelines describe sound credit risk management policies that address marketing, underwriting standards, collateral valuation management, individual account and portfolio management, and servicing.

 

 

 

 

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