Publication Of The November 2000 Update To The Commercial Bank Examination Manual

3. A Reinforcement of the Lending Standards for Commercial Loans to Address Supervisory Concerns about the Weakening of Internal Controls. New supervisory guidance focuses on the risks of overly aggressive lending practices due to an overreliance on favorable economic conditions. Supervisors and examiners are instructed to be alert to indications of an institution's insufficiently rigorous risk assessment, such as (1) an excessive reliance on strong economic conditions and robust financial markets (for example, borrowers whose financial capacity is inadequate to service their debts without access to capital markets on favorable terms); (2) an inadequate consideration of stress testing; or (3) a weakening of key internal controls in the lending process. Examiners are to be attentive to an institution's monitoring of its own credit practices, making certain that the institution's practices do not lead to a delay in recognizing emerging loan weaknesses. See SR 99-23.

4. The June 2000 FFIEC Uniform Retail-Credit Classification and Account-Management Policy (supersedes the February 1999 policy). The revised policy includes the following:

* Stressing the need for institutions to adopt and adhere to prudential internal standards on the number and frequency of extensions, deferrals, rewrites, and renewals of closed-end loans

* Limited re-aging of open-end accounts that participate in a debt-counseling/workout program, following receipt of at least three consecutive minimum monthly payments, or an equivalent cumulative amount

* A current assessment of value to be made no later than 180 days past the contractual due date for loans secured by real estate (any loan balance exceeding the property's value, less selling costs, is to be classified as a loss and charged off)

* A clarification that collateralized loans due to be charged off under the policy can be written down to the collateral's value, less cost to sell, instead of being entirely charged off

* A clarification that payments received after the applicable charge-off threshold, but before the end of the month in which the charge-off threshold is triggered, may be considered when determining if a charge-off remains appropriate.

The terms of the revised policy apply to federally insured depository institutions. Examiners are advised to review their methodology for aging retail loans. The contractual method of loan aging is more accurate and is required for reporting on the bank call reports. See SR 00-8.

5. December 1999 Joint Interagency Supervisory Guidance on Securitization Activities. The asset securitization section is amended to further underscore the importance of sound risk-management practices in all aspects of asset securitization. Guidance is provided on the risk management and valuation of retained interests arising from securitization activities. Retained interests, including interest-only STRIPs receivable, arise when a selling institution keeps an interest in assets sold to a securitization vehicle that, in turn, issues bonds to investors. Supervisory concerns exist about the methods and models banking organizations use to value retained interests and the difficulties in managing exposure to these volatile assets. The fair value of the retained interests should be documented and determined in accordance with generally accepted accounting principles. The valuation should be based on reasonable, conservative assumptions about such factors as discount rates, projected credit losses, and prepayment rates. See SR 99-37.

6. Revised Information Technology Examination and Supervisory Guidance. This expanded guidance gives greater emphasis to the role of information technology (IT) and its effect on an organization's safety and soundness. Instead of separate IT examinations, all examinations should include an assessment and evaluation of IT risks and risk management. Examiners must consider IT when developing risk assessments and supervisory plans, and in determining the level of review needed, given the characteristics, size, and business activities of the organization. See SR 00-3 and SR 98-9. The revised FFIEC Uniform Rating System for Information Technology (URSIT) (effective April 1, 1999) is also included. See SR 99-8.