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Putting RESPA to Rest, Once and for All

National Mortgage Professional
May 31, 2004

Banking Agencies Issue Expanded Guidelines on Sub-Prime LendingMortgagePress.comFederal Deposit Insurance Corporation, FDIC, Sub-Prime Lending The Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Office of Thrift Supervision have jointly issued the "Expanded Guidance for Sub-Prime Lending Programs." The guidance, which supplements previous sub-prime lending guidance issued on Mar. 1 of 1999, intends to strengthen the examination and supervision of institutions with significant sub-prime lending programs. The guidance applies to institutions with sub-prime lending programs that equal or exceed 25 percent of an institution's Tier 1 regulatory capital. For purposes of this guidance, "sub-prime lending" refers to programs that target borrowers with weakened credit histories, typically characterized by payment delinquencies, previous charge-offs, judgements or bankruptcies. These programs may also target borrowers with questionable repayment capacity evidenced by low credit scores or high debt-burden ratios. Highlights of the expanded guidance include: ++Specifying borrower characteristics that may indicate an institution is targeting the sub-prime lending market; ++Clarifying the standards to use when evaluating the adequacy of the Allowance for Loan and Lease Losses (ALLL); ++Establishing a case-by-case framework for determining the level of capital necessary to support sub-prime lending programs; ++Discussing examination procedures for assessing the quality of sub-prime loan portfolios; ++Identifying potentially predatory or abusive lending practices subject to the criticism of safety and soundness examiners; and ++Specifying documentation requirements for re-aging, renewing or extending delinquent sub-prime accounts. The agencies issuing the guidance recognize that responsible sub-prime lending may expand credit access for consumers and offer institutions the opportunity to earn attractive returns. However, institutions are expected to recognize both the elevated risk levels imposed by participation in sub-prime lending programs and the enhanced risk management standards needed to successfully engage in sub-prime lending. For more information, contact FDIC Examination Specialist Serena Owens at (202) 898-8996 or visit
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