Retail Lending Examination Procedures
Supplemental Examination Procedures
The supplemental procedures are organized by retail credit functional and product-specific areas. These procedures are targeted to larger, more complex operations, as well as to smaller banks whose condition requires more comprehensive review.
Examiners should select the appropriate procedures necessary to assess the condition and risk of the bank’s retail lending products and operations.
Management Planning
Objective: Assess the effectiveness of the overall planning process and the bank’s capacity, including management expertise and staffing, with respect to retail credit products offered and planned.
Discuss the bank’s planning process with management and determine whether the process is formal or informal. The applicability of the following steps will depend upon the size and complexity of the bank and the process in place.
Determine whether the retail credit component of the strategic plan is realistic and prudent given the current competitive, economic, and legal environments, and the bank’s capacity and level of expertise.
Assess the strategy and any supporting documents.
Determine whether the retail credit objectives are consistent with the bank’s strategic plan.
Determine whether marketing plans and budgets for retail lending are consistent with the retail credit objectives and the bank’s strategic plan.
Review the competitive analysis (bank-prepared) and available industry information.
Review the analysis of economic, legal, and other external factors.
Review the assumptions used to develop the plan and assess the reasonableness of the assumptions.
Review the organizational structure and management expertise in key positions; determine whether they are adequate to execute the plan (incorporating conclusions regarding capacity).
Determine whether the strategy establishes realistic risk tolerances.
Determine whether the plan incorporates risk parameters for growth, credit quality, concentrations, income, and capital.
Determine how the limits were established (e.g., assumptions used).
Assess the limits for reasonableness.
Discuss the key risks and obstacles (strengths, weaknesses, opportunities, and challenges) to achieving the plan with management.
Assess the adequacy of the bank’s process for tracking performance against the plan.
Determine the process to track actual performance against the plan.
Assess the adequacy of the process, including:
The timeliness, accuracy, and detail of reports.
Frequency of reports.
Report distribution, ensuring that results are provided to senior management and the board.
Assess the bank’s process for revising the plan and supporting operating or product plans to reflect current information and trends.
Determine whether management adequately considers the economic cycle in the planning process.
If the bank does not incorporate such information, determine whether planning is appropriate given the bank’s circumstances (e.g., size and complexity of operation, market).
Determine who develops the scenarios (e.g., finance, marketing, or risk management), and obtain copies of the best, worst, and most likely scenarios.
Review the assumptions used, the reasonableness of the assumptions, and the frequency of analyses.
Determine whether the bank uses stress testing. If the bank does not have such a process, discuss with management how the portfolio would withstand an economic downturn. For example, how does the bank ensure that underwriting standards are maintained at levels sufficient to withstand economic cycles?
Determine how management uses this information in the planning process.
If warranted, recommend that the bank adopt stress testing.
Determine whether the bank has sufficient management expertise and whether management is held accountable for executing the plan.
Using the organization chart, discuss the backgrounds and responsibilities of key managers with senior management. Confirm understanding of those roles with the key managers.
Obtain the criteria for key management compensation programs and position evaluations or performance elements. Determine whether they include appropriate qualitative (risk) considerations in addition to quantitative (growth or marketing) goals, and whether the goals are consistent with the bank’s plan. In addition, review key managers’ performance-based compensation for the most recent evaluation period to ensure that managers are, in fact, held accountable for meeting agreed-upon objectives.
Incorporate the results from the other examination objectives in reaching conclusions regarding management.
Determine whether the operational capacity, infrastructure, and MIS are sufficient to support and execute the bank’s strategic plan.
Determine whether key operations and systems managers are adequately involved in the planning process.
Discuss capacity planning with management (e.g., facilities, systems, staffing, and training).
If available, obtain and review the most recent capacity studies for staffing (including underwriting, collections, and control functions), facilities, systems, and technology. Assess adequacy, and identify the implications for plan execution. Assess management’s response to study findings, and the potential impact on current plans.
Review the retail organizational structure and note any significant changes in senior management or staffing levels, including turnover trends for significant functional areas.
Review the compensation plans in place for the various functional areas (e.g., sales/originations, collections), and assess the reasonableness of those plans.
Incorporate the results from the other examiners assigned to the review; determine whether any capacity, infrastructure, or MIS issues/problems have been revealed.
Ensure that management has a process for establishing specific performance goals for items such as loan growth, policy overrides, credit performance, and profitability for the retail portfolio as a whole and segmented by product. Determine whether management effectively tracks actual performance against these goals.
Determine whether management has appropriately considered loan loss allowance and capital needs and support in the plan.
Develop conclusions with respect to the effectiveness of the overall planning process and the bank’s capacity, including management expertise and staffing, with respect to retail credit products offered and planned.
Marketing and Product Development
Objective: Determine whether marketing activities are consistent with the bank’s business plans, strategic plans, and risk tolerance objectives, and that appropriate controls and systems are in place before the bank rolls out new products or new-product marketing initiatives.
Assess the structure and expertise of marketing, focusing on management, key personnel, and staffing adequacy.
Review the bank’s marketing plan and assess it for reasonableness given the bank’s strategic plan and objectives, level of expertise, capacity (operational and financial resources), market area, and competition.
Determine whether the bank bases its plan on internally or externally prepared market, economic, or profitability studies. If so, obtain and review copies of those studies.
Review the process for developing and implementing marketing plans, with particular attention to whether the appropriate functional areas (e.g., risk management, finance, operations, information technology, legal, and compliance) are involved throughout the process.
Assess the appropriateness of the data and assumptions used to develop marketing plans, in part through the review of MIS reports that track actual performance against marketing plans.
Discuss with management the controls in place to monitor marketing plans and activities. Note: Prior to the implementation of any marketing initiative, including the rollout of a new product or change to an existing product, management should review all marketing materials, consumer disclosures, and product features and terms to identify and address potential discriminatory, unfair, deceptive, abusive, and predatory lending practices. [8]
Discuss with management any significant changes made or planned to the bank’s account acquisition, account management, and cross-selling strategies, including changes in channels and the use of third-party vendors.
Assess new product development. Specifically:
Discuss with management the new product development process.
Determine whether there are written guidelines for what constitutes a new product.
Review new product proposals and plans approved since the last examination.
Determine whether the appropriate functional areas (e.g., risk management, finance, operations, information technology, legal, and compliance) are involved throughout the development process to ensure that associated risks are properly identified and controlled. In addition, determine whether the constituents remain involved during implementation.
Evaluate systems planning to determine whether MIS and reporting needs are adequately researched and developed before new products are rolled out. Specifically, determine whether the systems and reports are adequate to supervise and administer new products.
Evaluate the adequacy of the review and approval processes for new products.
Determine whether management, including appropriate legal and compliance personnel, reviews marketing materials during the product development and implementation to avoid deceptive or misleading advertising, terms, and disclosures.
Determine whether the planning process adequately identifies and addresses the risks, operational needs, and systems support associated with different solicitation methods and channels, including direct applications, preapproved offers, indirect (broker/dealer), loan-by-phone, and the Internet.
Evaluate the adequacy of the bank’s test process for new products, marketing campaigns, and other significant initiatives. Review the process to ensure that testing:
Is a required step for any new products or significant marketing and account management initiatives.
Is properly approved. Senior management should approve the testing plan, and it should determine that the proposed test is consistent with the bank’s strategic plan and meets strategic objectives.
Requires clear descriptions of test objectives and methods (e.g., assumptions, test size and selection criteria, and duration), as well as key performance measurements and targets.
Includes a strong test and control discipline. The test must include a clean holdout group and test groups that are not subject to any significant account management or cross-selling initiatives for the duration of the test. Note: Strict test group design enables management to draw more accurate performance conclusions.
Is accorded an adequate period of time, sufficient to determine probable performance and to work through any operational or other issues. When the test involves a significant departure from existing bank products or practices, test duration should probably be longer.
Note: Tests should run at least six months, and should usually run nine months or twelve months. The time frame may vary depending on the product or practice being tested.
Is supported by appropriate MIS and reporting prior to implementation.
Requires a thorough and well-supported postmortem analysis in which results are presented to and approved by senior management and the board before full rollout.
Determine whether management assesses how underwriting standards for the new products may affect credit risk and the bank’s risk profile.
Evaluate cross-selling strategies, including the criteria used to select accounts.
If the bank maintains a data warehouse, determine how it is used for marketing purposes and if it is capable of aggregating customer loan relationships.
Determine the adequacy and effectiveness of the bank’s controls with respect to information sharing, for both affiliates and unrelated third parties.
Prepare profiles for each of the products offered. Address:
Product description, including any unique characteristics and a general overview of terms (including pricing), target market (credit quality and geographic), and distribution channels.
Changes in the product characteristics since the last examination.
Volume and trends summary, discussing growth to date and planned.
Select at least one new product introduced since the prior supervisory activity to assess the bank’s planning process. Specifically, review:
The planning documents and the final approved proposal.
Tests and analysis conducted, including performance compared to expectations.
MIS tracking reports.
Available risk management, quality assurance, and audit reviews.
Any subsequent product modifications and the basis/documented support for those changes.
Management review and approval documentation.
Information presented to the Board of Directors.
Develop conclusions about whether marketing activities are consistent with the bank’s business plans, strategic plans, and risk tolerance objectives, and whether appropriate controls and systems are in place before new products or marketing initiatives are rolled out.
Underwriting
Objective: Assess the quality of the bank’s new loans and any changes from past underwriting; determine the adequacy of and adherence to retail credit lending policies and procedures; and gain a thorough understanding of the processes employed in account origination.
Ascertain and evaluate the types of lending and leasing the bank engages in, and evaluate the reasonableness of the following:
Loan products offered and planned.
Underwriting standards and terms.
Degree of innovation (e.g., new terms, products, and markets).
Markets served and economic conditions.
Competitive environment.
Volume and proportion of loan portfolio (managed and on book), by product.
Level of participation in high-risk or subprime lending.
Types of marketing and account acquisition channels.
Historical and planned growth.
Securitization activities.
Note: When evaluating lending activities, examiners should remain alert for practices and product terms that could indicate discriminatory, unfair, deceptive, abusive, or predatory issues.
Review new account metrics to determine the composition and quality of accounts currently being booked and the adequacy of MIS to track new loan volume. Compare the quality of recent bookings to the quality of accounts booked in the past. Metrics evaluated, by product, should include:
Application volume, and approval and booking rates.
Distribution of credit scores, if used, by applications, approved, and booked.
Price tiers and fees.
Loan-to-value/advance rate ratios.
Average loan amount.
Initial utilization or draw rate (open-end credit).
Debt-to-income and/or payment-to-income ratios.
Geographic distribution.
Override volume.
Credit policy exceptions.
Obtain an overview of the origination process and the steps involved, including application receipt and processing, underwriting, and collateral perfection and documentation. When describing the process in the work papers, document the following:
Which aspects of the underwriting process are automated versus manual.
Use of credit scoring models (e.g., types of models, history of model use, monitoring, and validation).
Differences in the underwriting processes arising from the application channel (i.e., direct mail, telemarketing, Internet, and broker/dealer), and the differences for unsolicited versus pre-qualified or pre-approved applications.
How security interests are perfected, who is responsible, and how filings are tracked.
Whether insurance coverage is verified and whether it is monitored thereafter.
Determine how management evaluates underwriter performance, including monitoring new loan MIS and subsequent performance MIS by underwriter, and transaction testing completed for each underwriter by the manager, quality assurance, and loan review.
If the bank uses credit scoring in the underwriting process, assess the mix of automated and judgmentally approved loans. Also, refer to the credit scoring steps in the “Risk Management and Control Functions” section of the “Supplemental Examination Procedures.”
For banks that lend in multiple geographic areas/states, confirm that management performs periodic bureau preference analyses to determine optimal credit bureaus for different states or localities.
Obtain a copy of the bank’s retail credit lending policies and procedures. Assess the adequacy and soundness of the policies and procedures, focusing on the main criteria used in the decision-making process and, if applicable, the verification processes used to confirm application and/or transaction information. Evaluate:
Permissible types of loans.
Lending authority and limits, and the exception approval process.
Limits on concentrations of credit (e.g., product, geographic, broker, dealer, and score band).
Credit underwriting criteria, including measurements of the borrower’s capacity to repay the loan (e.g., debt-to-income and payment-to-income ratios) and treatment of derogatory credit bureau items.
Credit scorecard cut-offs and tolerances for overrides.
Borrower credit grade definitions (e.g., A, B, and C).
Repayment terms (e.g., duration, amortization schedule, and pricing).
Maximum amount financed and loan-to-value (LTV) ratios, including allowable options and verification of options and add-ons, as applicable.
Permissible collateral (furniture, automobiles, service contracts) and lien perfection requirements.
Collateral valuation guidelines and methodologies.
Exception and override processes, criteria, and tracking.
Determine whether the policies and procedures provide adequate guidance to avoid discriminatory, unfair, deceptive, abusive, and predatory lending practices. Policies and procedures should address, if applicable, the circumstances in which the bank may make loans involving features or actions that have been associated with discriminatory, unfair, deceptive, abusive, and predatory lending practices, including:
Lending predominantly on the liquidation value of collateral rather than the borrower’s ability to service the debt.
Refinancing loans frequently.
Refinancing special subsidized mortgages that contain terms favorable to the borrower.
Requiring single-premium credit life insurance or similar products.
Using negative amortization.
Requiring balloon payments in short-term transactions.
Charging prepayment penalties in the later years of a loan.
Charging high financing points, fees, and penalties.
Increasing interest rates upon default.
Inserting mandatory arbitration clauses.
Making high-cost loans (e.g., loans subject to the Home Ownership and Equity Protection Act). [9]
Additionally, policies and procedures should provide adequate guidance to ensure that loans offered to borrowers are consistent with their needs, objectives, and financial condition. If weaknesses or concerns are found, consult the bank’s EIC or compliance examiner.
Note: For additional information refer to the Comptroller’s Handbook, “Fair Lending” booklet and OCC Advisory Letters, 2002-3, “Guidance on Unfair or Deceptive Acts or Practices”; 2003-2, “Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices”; 2003-3, “Avoiding Predatory and Abusive Lending Practices in Brokered and Purchased Loans”; 2004-4, “Secured Credit Cards”; and 2004-10, “Credit Card Practices.”
Assess the adequacy of the process for changing underwriting standards. Review all changes in standards since the last examination, and determine their effect on the quality of the loan portfolio.
Review analyses and documentation supporting recent changes to underwriting criteria and score cut-offs.
Discuss reasons for changes (if not readily apparent) with bank management and determine whether there has been a shift in the credit risk appetite.
Determine whether all affected functional areas provide input to underwriting changes.
Verify that management maintains a chronology of significant changes to underwriting standards.
Determine the adequacy of the bank’s verification procedures and verify that, at a minimum, residence, employment, income, and collateral values are routinely confirmed for subprime borrowers.
Evaluate credit policy exception and scorecard override limits and tracking/reporting. Determine whether:
Volumes conform to policy limits, and that those limits are reasonable.
Management tracks the volumes and trends of policy exceptions (by type) and overrides separately and by reason code.
Management tracks the performance (i.e., delinquencies and losses) of these accounts over time, by type, and compares the performance to that of the overall portfolio.
As warranted, management responds appropriately to the levels of overrides and exceptions, adjusting underwriting policies and exception limits or providing additional underwriter training accordingly.
Management appropriately identifies the effects of the levels of exceptions and overrides and the performance of affected accounts on the quantity and direction of credit risk.
Determine whether the volume of collateral exceptions is reasonable and is tracked appropriately and whether the impact is assessed.
Determine how management tracks lapsed insurance coverage, and how management addresses coverage lapses (e.g., contacting borrowers to reinstate insurance, requiring forced-place insurance, or maintaining third-party insurance coverage on the portfolio). If forced-place insurance is used, determine whether management tracks unpaid premiums.
Select and work appropriate samples to determine credit quality; to verify adherence to bank underwriting policies, including verification procedures; to assess the adequacy of analysis and decision documentation; to determine that MIS reports accurately capture exception information; and to determine whether practices exist that are inconsistent with bank policy or that are not adequately depicted in existing management reports. For each significant product type:
Sample recently approved accounts to assess adherence to underwriting policy. If the bank uses credit scoring, select two samples, one sample from accounts not automatically approved (e.g., judgmental decision involved even if credit scoring is used as a tool) and one sample from accounts automatically approved. Ensure that your sample includes loans originated from each significant marketing channel and, if warranted, consider expanding the sample to more thoroughly test specific channels.
Sample recently approved accounts that represent exceptions to underwriting policy to determine whether credit decisions are consistent and whether the analysis and other support for them is adequate.
If the bank uses brokers, dealers, or other third-party originators (TPOs), sample recently approved loans from each significant TPO, with emphasis on loans made with exceptions, if any. Assess adherence to bank policy, consistency of decision making, and adequacy of supporting documentation.
Use the bank’s credit files, account origination systems, and MIS reports to create a worksheet to summarize information for the sample. The worksheet should be tailored to fit the product and the bank’s underwriting criteria, but will generally include the following information:
Account data — name, account number, origination date, employment information, time at residence.
Underwriting terms — credit score (bureau, pooled, and/or custom), debt-to-income, loan-to-value, pricing, loan term, payment amount.
Collateral information — invoice price and options (automobiles), appraised value and lien information (real estate), insurance verification.
Underwriting policy exceptions and score overrides (indicate whether bank or examiner identified).
If prepared properly, the worksheet will facilitate examiner analysis and provide a sound foundation for reaching conclusions about the adequacy of the bank’s policy and adherence thereto.
Based on the results of the testing and the severity of the concerns identified, determine whether the samples should be expanded. Refer to for additional sample appendix A, “Transaction Testing,” suggestions.
Develop conclusions with respect to the quality of the bank’s new loans, any changes from past underwriting, the adequacy of and adherence to retail credit lending policies and procedures, the processes employed in account origination, MIS for monitoring new loan volume, and implications for the risk profile of the loan portfolio. Clearly document all findings.
Third-Party Originations (Includes Brokers and Dealers)
Note: Also see “Third-Party Management” in the “Supplemental Examination Procedures” for information on contracts, due diligence, and performance monitoring.
Determine whether the bank has underwriting guidelines and governing contracts for purchasing loans originated by third parties and assess the reasonableness of those guidelines. Verify that the bank has the ability to reject loans that do not meet its criteria.
Determine the adequacy of processes in place, including quality control, to ensure that purchased loans are consistent with the bank’s underwriting criteria. Specifically, determine:
How policies are communicated to third parties.
The adequacy of the policy adherence, performance monitoring processes, and reporting.
Assess the adequacy of the bank’s process for establishing relationships with brokers, dealers, and other origination sources. Note: Be alert to any insider and affiliate relationships, conflicts of interest, concentrations, and the originators’ ability to perform on recourse commitments.
Review the bank’s due diligence process and qualification requirements.
Sample new and significant existing relationships, and review the file documentation and agreements to determine adherence to due diligence and qualification requirements.
Evaluate the broker and dealer monitoring process. Determine whether:
MIS and reports provide sufficient information to track and evaluate the performance of individual brokers and dealers, including:
The volume of applications, approvals, and bookings.
Booking quality (e.g., credit scores or grades).
Exceptions and overrides.
Credit performance (e.g., delinquencies, losses, first or early payment defaults, and repossessions).
Profitability.
Management performs annual or periodic reviews of brokers and dealers.
Management maintains a broker and dealer watch list and terminates relationships that are not meeting underwriting guidelines and quality standards.
Evaluate dealer reserve arrangements and the procedures for managing those reserves. Review the adequacy of the bank’s procedures for advancing dealer differentials and for recovering advances on early payoffs and defaults.
Vehicle Loans and Leases
Review management’s process for identifying and monitoring portfolio concentrations (e.g., make, model, type, maturity, LTVs greater than 100 percent, and roll-in of prior vehicle’s loan balance). Discuss with management the risks of any significant concentrations, such as a high percentage of sports utility vehicles or a significant percentage of the portfolio maturing within a given time frame.
Determine whether the bank carries material volumes of lease-like loans [10] and incorporate this information into the leasing and residual risk [11] analysis.
If the bank is engaged in leasing and offers lease-to-loan or lease-to-lease products at the end of the lease term, evaluate the reasonableness of the underwriting criteria used. Be particularly sensitive to whether the activity allows for refinancing or renewing at amounts more than the value of the vehicle.
Review lease discounting (booking operations). Determine whether management has developed:
Adequate processes for verifying key elements of the transaction (e.g., cap costs, residual values, and fees).
MIS reports to track and evaluate the effectiveness of the discounting process.
Proper staffing levels in high-growth situations.
Assess the adequacy of the bank’s policies, procedures, and practices with respect to lease residuals.
Determine whether lease residual values are established using guidebook values (e.g., ALG or Kelly) or some other method, and assess the reasonableness of the process and the values assigned.
Determine whether the bank enhances or adjusts guidebook values. If so, review the method and supporting documentation, and assess the underlying rationale. Examples of enhancements include:
Adding dealer-installed optional equipment that is not consistent with guidebook add-ons.
Using a value that exceeds the maximum recommended MSRP.
Originating an odd-term lease (such as 39 months), but basing the residual value on a 36-month maturity.
Allowing free or bonus mileage.
Review compliance with FAS 13, Accounting for Leases, by determining whether:
Management reviews residual values at least annually.
Management uses appropriate assumptions in its reviews.
Any other than temporary impairment identified during the management reviews is expensed.
Any write-downs are not subsequently revised upward.
Review any residual value insurance programs, including:
Management’s process for selecting coverage.
The type of insurance in place (e.g., catastrophic, full, full with deductible, and deductible), and any limitations or exclusions.
Basis for determining premiums.
Historical trends of insurance claims versus premiums paid by book of business.
Basis for approving or denying insurance claims.
Review the appropriateness of bank management procedures for determining if a lease transaction should be accounted for as a direct finance lease or an operating lease.
Real Estate Secured Loans
For loans secured by residential real estate, assess the adequacy of the bank’s appraisal and collateral valuation processes as follows:
Review the bank’s residential real estate lending appraisal and evaluation policies and procedures to assess the appropriateness of the collateral valuation program.
Ascertain the types of valuation methods used to determine collateral values.
Determine why the bank uses one method versus another, and assess the reasonableness and adequacy of the method(s) employed and the supporting rationale. Note: Banks typically consider costs, timeliness, and accuracy.
Determine how management monitors the quality and certifications of appraisers, how appraisers are added to or deleted from the approved appraiser list, and whether the bank maintains an appraiser “watch list” to monitor marginal appraisers. Also determine how management selects and monitors the performance of individuals who perform evaluations.
If the bank uses tools such as automated valuation models (AVMs) or tax assessment values to meet evaluation requirements, determine the extent of usage (i.e., for portfolio management or to underwrite individual transactions). Also ascertain how management evaluates and ensures the accuracy and validity of these valuation tools on an ongoing basis.
Ascertain compliance with 12 CFR 34, ensuring that:
Appraisals and valuations meet regulatory requirements and content standards discussed in the “Interagency Appraisal and Evaluation Guidelines,” issued October 27, 1994. Refer to appendix E of the Comptroller’s Handbook, “Commercial Real Estate and Construction Lending” booklet.
The bank maintains an effective compliance review function.
Independence for ordering and reviewing the appraisals and valuations is maintained.
Loans and lines made in excess of supervisory loan-to-value limits are tracked in aggregate, do not exceed 100 percent of capital when combined with other loans in excess of supervisory limits, and are reported to the board of directors quarterly.
Determine the adequacy of the appraisal quality control process, including loan coverage and re-appraisals (triggering criteria and appraisers used) or re-evaluations.
If mortgage brokers, correspondents, or other third parties are used to source transactions, ascertain that controls are in place to monitor their compliance with the bank’s underwriting and standards for valuation independence.
Account Management
Objective: Assess the effectiveness of activities and strategies used to enhance performance and increase profitability of existing, nondelinquent accounts or portfolios, and determine the implications for the quality of the portfolio and the quantity and direction of risk.
Account management activities are used extensively in open-end lending for products such as credit cards, home equity lines, and other unsecured lines of credit. However, banks should actively monitor and manage existing closed-end accounts as well. Therefore, the following procedures, while more applicable to open-end products, include aspects relevant for closed-end products.
Determine whether bank systems are capable of aggregating the entire loan relationship by customer (multiple loan accounts by product and in total) for the purpose of customer-level account management. If so, determine the extent to which the bank uses that capability.
Determine whether the bank uses credit scoring for nondelinquent account management. If so, identify the type of scoring used (e.g., refreshed bureau, behavior, and bankruptcy scores), the frequency of obtaining updated scores, and how the scores are used in the account management process.
If the bank does not use or augments scoring, determine how management reviews the bank’s account base for changes in credit quality (e.g., bureau warning screens or delinquent property tax notifications) or to identify marketing opportunities. Determine whether the process is reasonable, including any actions taken based on the reviews.
Review and assess the adequacy of written policies and procedures, including disclosure requirements, governing account management activities. Account management activities may include:
Bureau-based, [12] performance-based, [13] and other re-pricing initiatives.
Line increase and decrease programs.
Line suspension, convert to amortization, and closure programs.
Graduation programs. [14]
Balance transfer and convenience check offers.
Payment holiday programs.
Pay ahead programs. [15]
Customer service re-ages, extensions, and deferrals.
Retention programs. Note: Retention programs are critical to relationship management and attrition. Be alert to whether the programs are proactive or reactive, and how management measures performance.
Determine the adequacy of the bank’s administration of account management programs. Specifically:
Review the adequacy of the program or strategy approval process and assess whether all interested units are appropriately represented (e.g., risk management, marketing, customer service, compliance, information technology, and finance).
Assess whether the analyses performed to support new and existing strategies are adequate and appropriately consider all possible effects of the proposed actions (e.g., the effects on credit performance, attrition and adverse retention, earnings, and compliance and reputation risks). In addition, determine whether analyses properly consider the impact of overlapping or repeat account management strategies.
Determine whether the bank performs adequate testing of strategies that have the potential for significant impact on credit performance and earnings prior to full implementation. Testing is particularly important for re-pricing and line management initiatives, and should be conducted for a minimum of six months, but preferably for twelve months.
Ensure that the bank has developed and implemented appropriate MIS reports prior to initiating testing and strategies, and that management regularly monitors and analyzes actual versus expected results.
Assess the adequacy and timeliness of management’s response to poorly performing strategies, as well as the actions taken when strategies perform significantly better than expected.
Assess the reasonableness of the bank’s account management strategies, evaluating the scope and frequency of each strategy employed, the inclusion and exclusion criteria, the various strategy components and outcomes, and adherence to the approved proposals and written policies and procedures. Note: Keep in mind that payment holiday programs should only be offered to the most creditworthy customers, and that pay-ahead programs are discouraged.
Review the policies that govern imposing and waiving late, over-limit, extension, annual, and other fees. Determine whether the policies are reasonable, and that the effect on performance is adequately monitored, analyzed, and acted upon.
Based on the significance of the bank’s use of account management activities, determine whether account sampling is warranted. If so, refer to the sampling procedures below and in appendix A, “Transaction Testing.”
Develop conclusions with respect to the effectiveness of activities and strategies used to enhance performance and profitability of existing, nondelinquent accounts or portfolios, and any implications for the quality of the portfolio and the quantity and direction of risk. Clearly document all findings.
Evaluate the adequacy of the bank’s transaction authorization process, assessing transaction limits (e.g., dollar amount, frequency, and cash versus purchase allocations), and criteria used to “block” accounts (prohibit additional transactions). In addition:
Ascertain the types of transactions (e.g., small dollar transactions, recurring transactions, delayed postings, such as rental cars) that are likely to circumvent the bank’s authorization process and determine how the bank manages that risk.
Determine how the bank handles payments returned for insufficient funds, and the adequacy of the bank’s policies for large payment holds.
For home equity lines of credit, determine how the bank handles the line when a borrower’s creditworthiness deteriorates or the property value declines.
Determine whether the bank allows borrowers to exceed their credit limits. If so:
Determine the amount and reasonableness of the over-limit authorization buffers, if any.
Assess the bank’s over-limit strategies, focusing on how the eligibility criteria are developed, whether the strategies are appropriately tested, the adequacy of the initial and ongoing analyses supporting the strategies, and the management approval process for the program.
Assess the adequacy of over-limit MIS reporting and assess whether it provides accurate data reflecting over-limit volume, trends, and the subsequent performance of over-limit accounts.
Review the requirements of the account terms and conditions for curing over-limits and determine whether the bank enforces these requirements. Assess the adequacy of the bank’s process.
Review internal reports on over-limit activity. If the volume is significant or if negative trends are evident, discuss with management.
Conduct transaction testing to verify the initial conclusions on the prudence of the bank’s account management strategies. Determine whether the accounts reviewed are performing consistent with program assumptions and expectations and whether the action resulted in a change in credit risk. In addition, determine whether accounts conform to initiative criteria, MIS reports accurately capture tracking information, and management has adequately identified and controlled the impact of repeat and competing strategies:
Sample accounts from at least one of the significant bureau and performance-based re-pricing initiatives since the last examination. In addition to the items mentioned above, determine whether the accounts received other price increases in the last 12 to 18 months and whether the accounts also received line increases or other favorable account treatment during that time. Identify current or probable performance issues and, if possible, causes.
Note: When selecting the initiative to sample, consider the size of the population affected, the amount of the change, or the initiative with the greatest performance variance from program projections. Place emphasis on the older initiatives with characteristics similar to current initiatives in order to gain the longest subsequent performance period.
Sample accounts from at least one of the significant automated line increase and decrease initiatives since the prior supervisory activity. Consider the factors listed in (a) in selecting the sample initiatives and in working the sample. For real estate secured lines, determine the validity of the bank’s valuation method and compliance with 12 CFR 34.
Sample accounts that exceed approved credit limits by a certain threshold (e.g., accounts 10 percent or more over the limit) as of the last statement or billing date. Determine why the accounts are over the limit (e.g., authorization, insufficient funds, or other issues); when the bank imposes or suspends over-limit fees; how the minimum payment is calculated; and whether practices are consistent with the disclosures in the account’s terms and conditions. In addition, determine whether negative amortization exists and, if so, the extent thereof.
Sample accounts that received manual line increases or decreases, price increases, or other significant treatment, and assess whether the policies were consistently applied and whether the analyses and decisions were well-documented.
Closed-End Credit (Vehicle and Real Estate Loans)
Determine how the bank handles payments returned for insufficient funds or other reasons. Verify that accounts are returned to the appropriate delinquency status if the payment instrument does not clear.
Evaluate the adequacy of the bank’s process for handling voluntary collateral turn-ins for current loans. Specifically, determine the bank’s process for valuing the collateral, taking associated charge-offs, and dealing with deficiency balances.
Determine whether the bank will renew, modify, or rewrite existing loans to nondelinquent customers. If so, evaluate the adequacy of the process, including the policies and procedures employed and the volume, trends, and subsequent performance of those loans.
Assess the adequacy of the bank’s process for monitoring ongoing insurance coverage and the loss payee status on collateral.
Collections
Objective: Evaluate the effectiveness of the collection function, including the collection strategies and programs employed, to better assess the quality of the portfolio and the quantity and direction of credit risk.
General
Assess the structure, management, and staffing of the collections department. If not previously performed:
Review the organization chart for the department and evaluate the quality and depth of the staff based on the size and complexity of the operation.
Discuss with senior management staffing plans for each major collection activity (e.g., early stage, late stage, fraud, and agency management - both third-party collection and credit counseling agencies), including how plans fit with department and bank objectives (e.g., growth and credit performance projections).
Review the experience levels of senior managers and supervisors.
Assess the adequacy of the bank’s training program for collectors through discussions with management.
Assess the appropriateness and administration of the bank’s incentive pay program for collectors. Pay particular attention to possible negative ramifications of the plan, such as the potential to encourage protracted repayment plans, aggressive curing of accounts, or individual rather than team efforts. Determine whether the plan limits the total incentive pay a collector can receive.
Determine whether the board or senior management reviewed and approved the incentive pay program prior to implementation.
Assess the adequacy of the bank’s written collection policies and procedures. Determine whether they cover all significant collection activities and comply with OCC Bulletin 2000-20, “FFIEC Uniform Retail Credit Classification and Account Management Policy” and OCC Bulletin 2003-01, “Account Management and Loss Allowance Guidance.” Refer to the checklists in appendixes C and D.
Verify that the bank’s policies prohibit the rebooking of accounts that are charged off for anything other than bank error.
Determine whether the bank is considered a debt collector as defined by the Fair Debt Collection Practices Act. If so, ensure appropriate review at the next compliance examination.
Identify where management has implemented automated decisions (i.e., charge-off, re-aging, extensions) to comply with the above policy guidelines.
Evaluate the adequacy of the bank’s classification, nonaccrual, and charge-off practices and whether the practices comply with the bank’s written policies and procedures. Specifically:
Discuss practices with both management and line personnel. Identify any inconsistencies with policies and procedures versus practices. Ensure examiners assisting with the collection review and conducting testing are aware of these inconsistencies.
Identify where management has implemented automated processes versus manual processes to comply with policies. Review the system settings to verify that the parameters correspond to those described in the bank’s policies and allow compliance with FFIEC policies. If not, discuss the differences with management and request appropriate corrective action.
Request management’s summary of classified retail and residential real estate loans. Determine if the classification practices comply with OCC Bulletin 2000-20, “FFIEC Uniform Retail Credit Classification and Account Management Policy.” Generally, all retail loans and certain residential real estate loans should be classified substandard at 90 days past due.
Request management’s summary of nonaccrual retail and residential real estate loans. If the bank does not place retail and residential real estate loans on nonaccrual, determine that the bank employs appropriate methods to ensure income is accurately measured (e.g., loss allowances for uncollectible fees and finance charges).
Determine how accounts scheduled for charge-off are loaded into a charge-off queue or other system for loss. Specifically, determine whether losses are automatically or manually processed, what circumstances, if any, will delay a charge-off, and when the bank recognizes losses (i.e., daily, weekly, or monthly).
Request a report detailing closed-end accounts more than 120 days past due and open-end accounts more than 180 days past due that have not been charged off or, if secured, written down to the value of collateral, less cost to sell. Review the report with management, and determine why those balances remain on the bank’s books and whether there are system or policy issues that need to be corrected.
Evaluate the adequacy of the bank’s policies and practices for payment posting and assessing late fees.
Review the payment posting procedures and practices and determine if payments are promptly posted.
Determine the conditions under which late fees are imposed [16] and, if applicable, at what point the fees are suspended.
Determine the bank’s policy for collecting late fees (e.g., as part of the next regularly scheduled payment) and how unpaid late fees are accounted for, tracked, and collected.
Determine whether the bank’s process for evaluating the ramifications of changes in late fee policies, including dollar amounts and grace periods, is adequate prior to broad implementation.
Assess whether the available MIS and reports provide the information necessary to evaluate the effect of late fees. Specifically, assess whether the information is sufficient to allow management to determine whether the fees have the desired effect on performance (i.e., improve on-time payments), whether late fees result in negative amortization, and the extent to which late fees assessed are actually collected.
Ensure that the bank has established adequate loss allowance for accrued but uncollectible interest and fees, including late fees, in either the allowance or a separate reserve.
Assess the appropriateness of management’s collection strategies.
Through discussions with management, determine how management develops collection strategies, who is responsible, and how the success of the strategies is measured.
Determine what triggers strategy changes, and who has authority to direct revisions.
Establish whether the bank uses scoring or any other predictive techniques to assist in the collection of accounts. If so, determine:
The scores or techniques used, how they are used, and whether they are internally or externally developed.
When the scores or techniques were last validated, by whom, and the results of the validation.
If applicable, assess the adequacy of the bank’s use of champion/challenger strategies.
Identify the person or group responsible for strategy development.
Determine that the development process begins with a clear identification of strategy objectives and relies on reasonable assumptions and complete and accurate MIS.
Determine that the bank’s controls provide for proper testing (i.e., test size, time frame, and account population and characteristics) of challenger strategies prior to making decisions to expand challenger penetration or to replace the existing champion strategy.
Assess the monitoring process and determine whether the bank accumulates and analyzes appropriate data to measure strategy success.
Determine that the bank maintains adequate documentation of the various strategies.
Determine whether the bank uses cure programs such as re-aging, extensions, deferrals, renewals, rewrites, fixed payments, internal or external workout programs (e.g., Consumer Credit Counseling Services (CCCS)), or settlement/forgiveness programs. If so:
Assess the adequacy of the policies and procedures used to administer the programs and compliance with the OCC 2000-20, “Uniform Retail Credit Classification Policy and Account Management Policy,” and OCC 2003-1, “Account Management and Loss Allowance Guidance” regarding limits, analysis, documentation, amortization periods, and allowance considerations.
Review and evaluate any test and analysis summaries completed prior to the implementation of new cure programs.
Determine whether the bank’s programs appropriately address proper income recognition for restructured loans.
Evaluate the MIS and reporting used to monitor and analyze the performance of each program. Compare performance with forecasts and bank objectives and tolerances. In addition to reports listed in procedure 10(b), ensure that management generates and reviews reports detailing:
Volume (balance and unit) trends for cure program accounts, by product, program, vintage, and in total.
Loss performance, by product, program, vintage, and in total.
Performance of the accounts 30, 90, 180, 270, 360, etc., days subsequent to the cure.
Performance of accounts cured more than once, broken down by the number of times cured and tracked over time.
Policy exceptions and the performance of those exceptions.
Compare the performance of accounts in cure programs with the performance of those in the general retail product population using performance measures in (d).
Assess the current and potential impact of such programs on the bank’s reported performance (asset quality) and profitability, including allowance and capital implications.
Review the bank’s “skip tracing” practices and procedures to track delinquent customers and determine their effectiveness.
Ascertain what portion of the portfolio lacks current/correct telephone numbers and mailing addresses.
Evaluate the adequacy of the bank’s process for obtaining missing contact information.
Determine whether the bank has a process to exclude accounts without pertinent contact information from promotional initiatives and favorable account management treatment.
If applicable, determine whether the bank appropriately monitors outside agencies used to skip trace accounts.
Determine whether skip accounts are flagged for accelerated charge-off if attempts to locate borrower are unsuccessful.
Assess whether the bank’s automated systems for collecting delinquent accounts are adequate and discuss these systems with management.
Determine which technologies and processes the bank uses to collect accounts (e.g., automated dialers, collection letters, statement messaging, and videos), how each is used, and the key reports generated to monitor performance. With respect to the latter, determine whether the reports provide sufficient data to allow management to make appropriate decisions.
If auto-dialing is used, determine how the system routes “no contact” accounts, or accounts that collectors remove from the dialer because of a promise to pay or a payment arrangement.
Determine whether the systems generate a sufficient audit trail.
Determine whether managers, supervisors, and quality control staff have the ability to listen to collector phone calls on-line.
Evaluate the adequacy of the bank’s contingency plans, and determine whether the plans are tested regularly.
Assess the quality, accuracy, and completeness of MIS reports and other analyses used to manage the collections process. Specifically:
Evaluate the quality of MIS collection reports regularly provided to executive management, and determine whether the reports provide adequate information, including comparisons with collection objectives and tolerances, for timely decision-making.
Determine the appropriateness and accuracy of key collection reports. Review specifically:
Vintage and coincident delinquency and loss reports.
Roll-rate reports and migration-to-loss reports.
Cure program reports, in total, by program, and by collector, including reports that track the volume (number and dollar) of accounts entering cure programs, accounts awaiting re-age or extension, and the actual performance of accounts in the various programs.
Collector and strategy or special handling queue reports.
Productivity reports, including information such as call penetration, right party contact, promises made and kept, dollars collected, and staffing summaries.
Note: If not removed, insufficient funds checks (NSF) can affect several of the metrics above. Management should have a method to identify, if not correct, the effects of NSF checks on the metrics.
Determine whether customer service or department other than collections can initiate collection activities, such as cure programs. If so, determine whether appropriate monitoring MIS are in place to monitor volumes and credit performance of accounts in collection activities initiated outside collections.
Evaluate the adequacy of the bank’s policies and procedures for foreclosure and repossession, and for the disposition of collateral.
Determine the point at which foreclosure or repossession processes are initiated.
Determine that policies and procedures provide for timely disposition of collateral and maximize liquidation values.
Evaluate the adequacy of the bank’s accounting for foreclosed and repossessed assets; specifically, determine that:
Foreclosed or repossessed assets are appropriately transferred from loans to other real estate owned or repossessed assets at the lower of book or fair market value less cost to sell. Note: Real estate should be transferred to other real estate owned once the bank gains effective control of or title to the property.
Assets are routinely evaluated for impairment, and that impaired values are charged off each quarter-end, at a minimum.
Management routinely reviews inventory aging reports and takes appropriate action on stale inventory (e.g., other real estate owned longer than one year, repossessed assets in the bank’s possession longer than 90 days).
Determine what system(s) the bank uses to recover charged-off accounts and deficiency balances and whether they interface with the bank’s collection management system(s). If not, determine how the recovery unit gathers and uses information about prior collection activities.
Determine whether the bank uses outside agencies (including attorneys and attorney networks) to collect delinquent accounts or to recover losses. If so:
Assess the bank’s due diligence process for selecting vendors.
Determine whether the bank’s legal counsel and compliance officer have reviewed the contracts with and practices of third-party collectors.
Evaluate any forward-flow contracts to collection agencies, including performance tolerances and termination requirements (important for remediation or severing the contract if poor performance). Note: Forward-flow contracts provide agencies a set number of accounts at a determined frequency and assist the bank in forecasting placements.
Determine the frequency and method of rotating accounts, including reasons supporting the method, between collection and recovery agencies and in-house collections, i.e., distinctions between primary, secondary, and tertiary.
Review productivity and cost reports for each vendor, and discuss with management how the bank monitors the success of third-party collectors and places work load accordingly.
Evaluate the systems and controls used to supervise out-placed accounts, including active reconcilements of amounts collected and fees disbursed to each vendor.
Review MIS used to monitor the performance of outside agencies.
Evaluate the adequacy and frequency of the bank’s audits (on-site and modem, if applicable) of third-party collectors.
Assess the bank’s recovery performance using historical results and industry averages, by product, as guidelines.
Determine whether the bank periodically sells charged-off accounts. If so, determine the reasonableness of forecasts.
Evaluate the bank’s recoveries in light of prior period losses.
Evaluate the accuracy of the recovery figures. If the bank charges accrued but uncollected interest and fees against income rather than the allowance, verify that recoveries are reported accordingly (i.e., include principal only). Refer to appendix D, “Account Management and Loss Allowance Guidance Checklist.”
Assess the costs associated with the dollars recovered, and explore trends.
Assess the appropriateness of the bank’s fraud policies and procedures.
Review the bank’s definition of fraud losses and ensure that it is reasonable and appropriately distinguishes fraud from credit losses.
Ascertain compliance with the charge-off requirements of OCC 2000-20, “Uniform Retail Credit Classification and Account Management Policy” (90 days from discovery).
Confirm that fraud losses are recognized as operating expenses rather than charges to the allowance for loan and lease losses.
Ensure that the bank’s policies differentiate between amounts in an account alleged to be fraudulent and undisputed amounts. For example, for open-end credit, some banks may re-age the entire amount owed to current pending the outcome of the fraud investigation when that treatment should not extend to undisputed amounts.
If the investigation negates the fraud allegation, verify that the bank returns accounts to the previous delinquency status and immediately reinstates collection efforts.
Review the adequacy of MIS reports pertaining to fraud.
Determine whether the information is sufficient to monitor fraud and the effectiveness of fraud controls, including the appropriate filing of suspicious activity reports (SARs).
Assess the levels and trends of fraud losses, by product, compared with industry averages and discuss any atypical findings with management. Note: Fraud losses are often depicted as fraud losses divided by sales.
Assess the adequacy of internal and external audit, quality assurance, loan review, and risk management in the collections area, including scope, frequency, timing, report content, and independence.
Review relevant audit, quality assurance, loan review, and risk management reports.
Determine the adequacy and timeliness of management’s responses to the issues identified and any findings or issues requiring follow-up. If warranted based on the significance of the issue or concerns about the adequacy of the response or action taken, test corrective action.
Conduct transaction testing to verify your initial conclusions with respect to the bank’s collection programs and activities. In addition to determining adherence to approved policies and procedures, determine whether the programs and activities result in an enduring positive change in credit risk or provide temporary relief. Verify that MIS reports accurately capture the activities and the subsequent performance of the accounts (referring to the appendix A, “Transaction Testing,” for additional guidance).
Sample accounts that were at least 60 days delinquent in the month preceding the examination and are now current to determine whether the customer cured the delinquency or whether the account was cured artificially (e.g., re-age or extension). If the latter, determine whether the action was consistent with existing bank policy, and that it complied with OCC 2000-20, “Uniform Retail Credit Classification and Account Management Policy.”
Sample accounts from each of the primary collection areas (e.g., early-stage, late-stage, skip, bankruptcy) to determine adherence to policy. The sample helps an examiner understand the collection process and strategies employed. Note: This sample is often best completed or supplemented by sitting with collectors as they work accounts.
Sample loans from each of the following areas to assess compliance with the bank policies for the programs and reasonableness of decisions: recent re-ages, workouts, extensions, deferrals, renewals, modifications, or rewrites. Decisions should also be compared with the bank’s normal underwriting guidelines with respect to loan-to-value, amortization period, debt or repayment limitations, and pricing.
Sample charged-off accounts and review all activities that occurred prior to charge-off to determine whether the bank employs practices that result in loss deferral.
Sample identified fraud accounts and review all activities to determine propriety of practices, adherence to policy, and timeliness of charge-off practices.
Develop conclusions with respect to the effectiveness of the collection function, including the collection strategies and programs employed, and the implications for the quality of the portfolio and the quantity and direction of credit risk.
Open-End Credit (Credit Card, Personal, and Home Equity Lines)
Determine the delinquency level at which the bank temporarily suspends lines of credit and the level at which it permanently closes an account. Also:
Determine whether scoring models or other methods contribute to decisions to permanently close lines of credit.
Evaluate the circumstances under which a closed account can be reactivated, and verify that the collections department refers such accounts to the credit department for an underwriting decision.
Ascertain whether the bank’s collection strategies include the use of default pricing (also known as penalty pricing). If so:
Determine the performance criteria used to trigger higher pricing, and the conditions that will return accounts to lower pricing.
Assess management’s objectives for imposing such a strategy and the quality of the supporting analysis. Be particularly alert to whether the analysis adequately considers the possible ramifications of the strategy, including reputation risk, negative retention, increased credit losses, and decreased interest income in the long term.
Determine that the strategy was properly tested using reasonable sample sizes and time frames, and that the initial performance assumptions were adequately validated prior to full rollout.
Determine management’s performance targets for the default pricing strategy, and review actual performance against those metrics.
Evaluate the adequacy of the MIS and reporting used to monitor the performance of accounts during and subsequent to default pricing.
Assess the timeliness and appropriateness of management’s response to negative strategy results.
Vehicle Loans and Leases
Assess repossession activity and performance, including the timeliness and appropriateness of repossession charge-offs and disposal, ensuring that management is aware of any third parties, including subcontractors, used during the process.
Assess the bank’s method of valuing repossessed assets, and determine whether repossessions are written down to fair value at the time of repossession or upon sale. If the latter, ensure that sales occur promptly and that the value of the asset is adequately adjusted in the interim for repossessions with protracted selling periods.
Evaluate how the bank disposes of repossessed assets. Focus on arrangements with local dealers, auction houses, and public or private sales, and how well management times the sales and balances inventory allocation with the various vendors.
Review repossession volumes and trends, including repossession rate (number of repossessions per 1,000 accounts), partial and full balance loss per repossession, and average time to disposal. For large automobile lenders, performance differences may be noted by geographic area, make, and model.
For leasing, review the accounts receivable aging for end-of-term fees, including excess mileage, wear and tear, and termination or disposition fees. Determine the level of the bank’s success with collecting these fees, and assess the need to write off uncollectible receivables if the fees are recognized on an accrual basis. Many lessors recognize fees on a cash basis.
Determine how management reviews vehicle residuals for other than temporary impairment per the requirements of FAS 13, Accounting for Leases. Verify that bank management expenses other than temporary residual impairment (writes the residual down to the anticipated residual value).
Review management’s residual realization reports. [17] For those segments with consistent residual realization rates less than 100 percent, determine the effectiveness of bank management’s procedures for recognizing other than temporary impairment of residuals. Direct bank management to recognize other than temporary residual impairment, if appropriate.
Determine whether the bank offers extensions to its lease customers. If so, determine how management quantifies, analyzes, and tracks other than temporary impairment for this segment of the portfolio. Note: Extending the term of the lease through payment extensions creates additional risk of loss due to additional vehicle depreciation.
Review the matured lease report and identify leases where the lessee has failed to return the vehicle. Review the adequacy of the bank’s procedures for charging off these balances as uncollectible.
Off-Lease Vehicle Remarketing
Assess how well the bank manages and reports on leases that have run their full term.
Discuss with bank management their vehicle remarketing methods (e.g., direct retail, auction, dealer consignment, and wholesalers).
Review and discuss scheduled run-off reports to identify concentrations (e.g., lease maturities, vehicle types, manufacturers, models, and geographic location).
Determine the appropriateness of staffing levels based upon the marketing method and projected turn-in volume.
Review past and present turn-in volume and management’s projections for next year.
Assess the effectiveness of strategies used prior to lease termination to minimize turn-ins (e.g., settlement offers and lease-to-loan or lease-to-lease products).
Determine whether the bank’s systems can analyze the costs and benefits of moving vehicles to different geographic areas to maximize sales value.
Review bank management’s procedures for charging off balances in excess of the net realizable value.
Review and assess the adequacy of management reports used to determine the effectiveness of the remarketing process. Reports should include:
The average loss or gain on remarketed vehicles in total and by vehicle segment.
The average loss or gain on remarketed vehicles by original term.
Comparisons of amounts received at sale versus average guidebook value.
Return rates in total, by lease term, and by vehicle type, make, and model.
Off-lease inventory aging reports.
Sales reports for sold inventory.
Matured lease reports where the lessee has failed to return the vehicle.
Comparison of actual results and metrics with the bank’s objectives and tolerances for remarketing.
Risk Management and Control Functions
Objective: Evaluate the adequacy of the bank’s processes for identifying, measuring, monitoring, and controlling risk by reviewing the effectiveness of risk management and other control functions.
If the bank uses affiliates or third-party vendors for loan acquisition, servicing, control, or other key functions, refer to “Third-Party Management” in “Supplemental Examination Procedures.”
Assess the structure, [18] management, and staffing of each of the control functions, including risk management, loan review, internal and external audit, quality assurance, and compliance review. Note: Compliance is clearly a significant risk for retail credit. While consumer compliance examiners generally assess the quality of the compliance review function, safety and soundness examiners should understand compliance-related roles, responsibilities, and coverage, as well as how compliance controls fit into the overall control plan.
Ascertain the roles and responsibilities and reporting lines of the various control functions through discussions with senior management.
Review the organization chart for each function, and evaluate the quality and depth of staff (including number of positions) based on the assigned role and the size and complexity of the operation:
Review the experience levels of senior managers and staff.
Determine whether employees are capable of evaluating the line of business activities.
Review management and staff turnover levels.
Discuss the structure and staffing plans, including known or anticipated gaps or vacancies, with senior management.
Review compensation plans to determine that performance measurements are appropriately targeted to risk identification and control objectives.
Determine whether organizational reporting lines create the necessary level of independence.
Discuss with senior managers how they ensure that significant risks are appropriately monitored by at least one control function, and how they assess the effectiveness of each function.
Determine whether the risk management function appropriately monitors, analyzes, and controls the bank’s credit risk.
Determine risk management’s recurring responsibilities and major projects, including status of projects, and assess the adequacy of those activities in light of the bank’s retail credit risk profile, the products offered, and the complexity of the operation.
Determine whether credit risk decisions involve all key functional areas, including risk management, marketing, finance, operations, compliance, legal, and information technology, either formally or informally.
Determine whether risk management is involved in tactical credit decisions, such as credit program approvals, program renewals, new products, marketing campaigns, and annual financial planning.
Obtain descriptions of key management reports to determine the types and purposes of reports produced, report distribution, and frequency of preparation.
Obtain a sample of recent ad hoc or special studies or board reports produced by risk management to determine the types of analyses performed, the reasonableness of the scopes and methodologies used, and the accuracy of the conclusions drawn, including the adequacy of the support provided.
Determine what technologies and risk tools are deployed and risk management’s role in the management of those tools, including data warehouse, portfolio management software, credit scoring and adaptive control systems, and risk models.
Determine whether market, competitive, legislative, and other external factors are considered in the risk management process.
Determine if management considers consumer complaints and complaint resolution in the risk management process. If not previously completed, obtain copies of the OCC (complaints reported to the Customer Assistance Group) and bank consumer complaint logs. Evaluate the information for significant issues and trends.
Note: Complaints serve as a valuable early warning indicator for compliance, credit, and operational issues, including discriminatory unfair, deceptive, abusive, and predatory practices.
Determine whether changes to practices and products, including new products and practices, are fully tested, analyzed, and supported prior to broad implementation. Note: See "Marketing and Product Development” in “Supplemental Examination Procedures” for testing guidelines.
Test the effectiveness of the bank’s risk management process for existing and new products, marketing and collection initiatives, and changes to risk tolerance (e.g., initiating or changing credit criteria or adopting new scoring systems/technologies). Select at least one significant new product, account management practice (e.g., line increase, pricing, payment holiday), or collections initiative (e.g., workout program, rewrite) and track it through all facets of the management process.
Planning. If tracking a new loan product, for example, determine how the bank developed new underwriting standards (e.g., how did it analyze the applicability of the underwriting criteria and marketing strategies then in use and what was the basis of any projections), and how did it derive new criteria or strategies (e.g., what were the key drivers for credit, revenue).
Execution. Evaluate the adequacy of the process employed to ensure that new criteria and changes were implemented as intended. Note: This component is generally performed by some combination of information technology staff, product management, quality control, audit, and loan operations.
Measurement. Ascertain how adherence to standards is measured and how management measures impact using back-end monitoring and analysis. Determine the key measurements management uses to analyze the effectiveness of its decisions (e.g., responder analyses, first or early payment default, vintage reporting for delinquencies and losses, activation/booking, utilization, risk-adjusted margin, profit and loss), and the adequacy of back-testing analyses (comparison to targets, identification and analysis of anomalies).
Adjustment. Determine how feedback results (lessons learned, opportunities identified) are incorporated into the process as course corrections or adjustments. Assess the process for making adjustments as problems or unexpected performance results are identified, and whether the process is both timely and appropriate.
Determine whether the bank has the data warehousing capabilities (i.e., the capacity to store and retrieve pertinent data) to support necessary monitoring, analytical, and forecasting activities.
Evaluate executive management’s monthly and quarterly report packages. Specifically:
Determine whether the reports accurately and completely describe the state of the bank’s retail lending.
Evaluate whether reports adequately measure credit risk (e.g., score distributions and vintage reports), identify trends, describe significant variances, and present issues. Note: Reports should allow management to assess whether retail operations remain consistent with strategic objectives and within established risk, return, and credit performance tolerances.
Determine whether reports clearly evidence analysis of performance results and trends rather than merely depict data.
Obtain feedback from other examiners assigned to the retail credit examination regarding the adequacy of reports available.
Credit Scoring Models
Refer to OCC bulletins 97-24, “Credit Scoring Models, Examiner Guidance” and 2000-16, “Risk Modeling, Model Validation” for additional background and guidance in this area.
Assess the scorecard management process, and determine the department or personnel responsible for scorecard and model development or procurement, implementation, including monitoring, and validation.
Obtain a model inventory to determine the models in use. The inventory should include:
Name of the model.
Model description.
Type (custom, generic, behavioral).
Date developed.
Source (name of the vendor or in-house modeler).
Purpose (e.g., application, response, attrition, pricing, profitability).
Date last validated and next scheduled validation date.
Models under development, if any.
Management contact for each model.
Determine whether scorecards are used for purposes consistent with the development process/populations. If not (e.g., applied to a different product or new geographic area), assess the ramifications and acceptability.
Review the most recent independent validation reports for key risk models, and discuss the conclusions with risk management.
Discuss how management uses the models to target prospects, underwrite applications, and manage the portfolio.
Determine how management measures the ongoing performance and robustness of models (e.g., good/bad separation, bad rate analysis, and maximum delinquency (“ever bad”) distribution reports).
Review scorecard tracking reports to determine how well the models are performing. Select tracking reports for key models and determine whether model performance is stable or deteriorating, and how management compensates for deteriorating efficacy.
Determine how cutoffs are established, reviewed, and adjusted. Review the most recent cutoff analysis for key risk models.
Determine the bank’s score override policy, assess the adequacy of associated tracking, and review override volume and performance. Determine whether management segments low-side overrides by reason and tracks delinquencies or defaults by reason and override score bands, and assess the performance and trends.
Review chronology logs to determine changes in the credit criteria or risk profile and to explain shifts in the portfolio, including volume and performance.
Select at least one key credit risk scoring model and fully assess the adequacy of the model management process:
Review the original model documentation or scorecard manual, and assess management’s adherence to the modeler’s recommended scorecard maintenance routine.
Compare the population characteristics and the developmental sample performance odds with the bank’s current experience.
Review model performance reports and assess the adequacy of management’s response to the issues or trends identified. Reports reviewed may include applicant distribution, population stability, characteristic analysis (if indicated by a population shift), override tracking, and vintage delinquency and loss distribution reports.
Loan Review
Assess the adequacy of the loan review process for retail lending. Determine whether:
Loan review’s scope includes providing a risk assessment of the quality of risk management and quantity of risk for retail lending in aggregate and by lines of business.
The scope includes appropriate testing for adherence to key credit policies and procedures.
The scope includes appropriate reviews to assess compliance with applicable laws, regulations, and guidance, including assessing whether any lending practices are discriminatory, unfair, deceptive, abusive, and predatory.
The scope includes a review of the accuracy and adequacy of MIS reporting.
The frequency of reviews is acceptable based on the significance of the risks involved.
Staffing levels and experience are commensurate with the complexity and risk in the retail lending area.
Loan review is independent from the production process.
Loan review possesses sufficient authority and influence to correct deficiencies or curb dangerous practices.
Review recent loan review reports for retail lending. Determine whether:
Reports are issued in a timely manner following completion of the on-site work.
Reports provide meaningful conclusions and accurately identify concerns.
Significant issues require management’s written response.
Management initiates timely and appropriate corrective action.
Issues identified and the status of corrective actions are tracked and reported to senior management.
Note: Weaknesses identified by examiners, but not identified by the loan review, may be evidence of deficiencies in loan review processes or staffing.
Quality Control
Assess the adequacy of quality control process for retail lending. Determine whether:
The process assesses ongoing compliance with key credit and operational policies and procedures, and applicable laws and regulations for all primary areas, including:
Loan origination.
Account management programs.
Fraud.
Customer service.
Collections.
Note: Quality control processes should be established for all direct lending activities and any third-party loan servicing and origination arrangements.
Quality control tests the integrity and accuracy of MIS data for areas listed in (a).
The frequency of reviews is properly geared to the significance of the risk.
The testing/sample sizes are appropriate.
The quality control function possesses sufficient authority and influence to correct deficiencies or curb dangerous practices.
Review a sample of quality assurance ongoing testing worksheets and periodic summary reports (e.g., monthly summaries of testing conclusions). Determine whether:
Reporting process allows for timely feedback to management.
Worksheets and summary reports accurately identify concerns.
Significant issues require management’s written response.
Management initiates timely and appropriate corrective action.
Issues identified and the status of corrective actions are tracked and reported to senior management.
Note: Weaknesses identified by examiners, but not identified by the quality control function, may be evidence of deficiencies in quality control processes or staffing.
If the quality assurance function is not independent from the loan production process, determine whether internal audit or loan review tests quality assurance to ensure that management can rely on those findings.
If reviews and testing by the quality control area do not include significant risk areas, communicate findings to the examiner-in-charge to determine whether it is appropriate to complete transactional testing in areas not covered by quality control.
Internal Audit
Assess the adequacy of internal audit for retail lending. Determine whether:
The scope includes appropriate testing for adherence to key credit and operational policies and procedures.
The frequency of reviews is properly geared to the significance of the risks.
Internal audit is independent.
Internal audit possesses sufficient authority and influence to correct deficiencies or curb dangerous practices.
Review recent internal audit reports for retail lending. Determine whether:
Reports are issued in a timely manner following completion of the on-site work.
Reports accurately identify concerns.
Significant issues require management’s written response.
Management initiates timely and appropriate corrective action.
Issues identified and the status of corrective actions are tracked and reported to senior management.
Note: Weaknesses identified by examiner, but not identified by internal audit, may be evidence of deficiencies in internal audit processes or staffing
Other Controls
Confirm that there is an adequate process in place to reconcile major balance sheet categories and general ledger entries on a daily basis.
Identify and determine the adequacy of the bank’s process for regularly evaluating data integrity and MIS accuracy.
Review the scope and frequency of internal audit or other reviews of MIS accuracy.
Review the findings of the most recent reviews.
Develop conclusions with respect to the adequacy of the bank’s processes for identifying, measuring, monitoring, and controlling risk by reviewing the effectiveness of risk management and other control functions. Clearly document all findings.
Profitability
Objective: Assess the quantity, quality, and sustainability of retail credit earnings.
For banks that securitize, examiners should also review income statements for managed assets.
Obtain and review copies of the income statement for the retail credit portfolio and for each significant product. Ensure that the reports are “fully loaded,” i.e., that they include all pertinent income and expense items including overhead and funding costs.
Ascertain the contribution of the retail credit portfolio to corporate earnings, and the expected contribution in the future.
Review executive management monthly and/or quarterly performance reports and portfolio quality MIS packages.
Review historical trends, including changes in the product contributions.
Review financial projections and budget and plan variances.
Review significant income and expense components and measures. Items reviewed should include noninterest income (fees and other add-ons), marketing expense, charge-offs, net interest margin, and risk-adjusted yield.
Evaluate the methodologies, assumptions, and documentary support for the bank’s planning and forecasting processes. Determine whether material changes are expected in any of the key income and expense components and measures.
Determine management’s return on assets (ROA), return on managed assets (ROMA), and return on equity (ROE) hurdles, and the actual returns as of the examination date. Note: Asset-based measures are typically more meaningful for comparison because banks allocate capital differently.
Verify that the bank appropriately recognizes uncollectible accrued interest and fees through the allowance for loan and lease losses, through a separate interest and fee reserve, or through cash income recognition.
Review the bank’s stress test and discuss potential earnings volatility through an economic cycle with management in order to assess sustainability. If the bank does not perform stress testing, discuss if and how management prices loans to withstand economic downturns.
Determine whether the bank’s cost accounting system is capable of generating profit data by product, segment (including grade), channel, and account.
Assess the profitability of each retail credit product:
For each product, review profitability by credit score band, credit grade, sub-portfolio (e.g., unsecured vs. secured credit card), segment (e.g., loan-to-value differences), and vintage, as appropriate.
Compare actual results with projections and discuss variances with management.
Evaluate profitability by channel.
Through discussions with the examiner responsible for third-party management, determine profitability generated through the various channels (e.g., dealers, brokers, and third-party originators).
Compare the profitability of the loans generated by the various channels.
Determine the adequacy of the pricing method.
Review the pricing strategy, pricing method, and pricing model, if applicable.
Review the major assumptions used in the pricing method and assess reasonableness. Be alert to differences in assumptions by product and channel.
Determine whether pricing is driven by risk, capital, or some other allocation method or hurdle, and how much, if any, it is driven by the competition.
Determine whether the pricing method incorporates a realistic break-even analysis, and whether the analysis reflects the true costs of premature account closures (attrition) and reductions (prepayment).
Review the pricing matrix, by product.
Assess the adequacy of planning, reporting, and analysis with respect to attrition and prepayment. Specifically, ascertain whether management identifies the volume and trends of accounts with high interest rates relative to market or low introductory rates to determine exposure and impact on earnings.
Develop conclusions with respect to the quantity, quality, and sustainability of retail credit earnings.
Third-Party Management
Objective: Determine the extent of third-party involvement in retail lending activities and evaluate the effectiveness of management’s third-party oversight and risk management processes.
These procedures apply to any arrangements with third parties to provide retail credit-related services to customers on the bank’s behalf. Banks may fully “outsource” loan originations (using brokers, dealers, or telemarketers, for example), collection activities (using collection agencies or attorneys), or the offering of products (debit and credit cards, for example) in the bank’s name.
The terms “third party,” “third-party vendors,” and “vendors” are used interchangeably throughout the following procedures. “Vendor management” is the term used to describe the bank’s process for overseeing these parties. Refer to OCC Bulletin 2001-47, “Third-Party Relationships, Risk Management Principles”; OCC Bulletin 2002-16, “Bank Use of Foreign-Based Third-Party Service Providers, Risk Management Guidance”; and Advisory Letter 2000-9, “Third-Party Risk” for additional information on OCC expectations.
Determine the adequacy of the bank’s third-party vendor management program.
Assess the adequacy of the vendor management policy, and determine that analysis, documentation, and reporting requirements are clearly addressed.
Determine that management has designated an individual to be responsible for the program, and delegated the authority necessary for its effective administration to that individual.
Review the bank’s process for maintaining a complete list of third-party vendors used by the bank.
Review the bank’s criteria for designating ”significant” vendors according to the dollar amount of the contract, the importance of the service provided, and the potential risk involved in the activity.
Note: While the vendor management program should address all vendor relationships, the OCC expects a more rigorous process to manage those vendors deemed significant.
Review the bank’s due diligence process and ensure the process:
Provides for comprehensive, well-documented reviews by qualified staff.
Identifies any potential conflicts of interest with bank directors, officers, staff, and their related interests.
Addresses compliance with all applicable laws and regulations, including safety and soundness regulatory standards, and laws prohibiting lending discrimination and unfair or deceptive practices.
Identify vendors that provide significant retail credit services on the bank’s behalf, particularly those that provide loan origination, servicing, or complete products. Determine the bank’s relationship manager for each of those vendors.
Verify that bank management’s expertise in the outsourced activities is sufficient to accurately identify and manage the risks involved.
Determine whether management has adequate controls, including policies and procedures and monitoring controls, to avoid becoming involved with a third party engaged in discriminatory, unfair, deceptive, abusive and predatory lending practices. Policies and procedures should address, if applicable, the circumstances in which the bank may make loans involving features or actions that have been associated with discriminatory, unfair, deceptive, abusive, and predatory lending practices, including:
Lending predominantly on the liquidation value of collateral rather than the borrower’s ability to service the debt.
Refinancing loans frequently.
Refinancing special subsidized mortgages that contain terms favorable to the borrower.
Requiring single-premium life insurance or similar products.
Using negative amortization.
Requiring balloon payments in short-term transactions.
Charging prepayment penalties in the later years of a loan.
Charging high financing points, fees, or penalties.
Increasing interest rate increases upon default.
Inserting mandatory arbitration clauses.
Making high-cost loans (e.g., loans subject to the Home Ownership and Equity Protection Act).
If weaknesses or concerns are found, consult the bank’s EIC or compliance examiner.
Note: For additional information refer to the Comptroller’s Handbook, “Fair Lending” booklet, and OCC advisory letters 2002-3, “Guidance on Unfair or Deceptive Acts or Practices”; 2003-2, “Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices”; 2003-3 “Avoiding Predatory and Abusive Lending Practices in Brokered and Purchased Loans”; 2004-4, “Secured Credit Cards”; and 2004-10, "Credit Card Practices."
Assess the adequacy of contract management, focusing on the process for ensuring that clauses necessary to effectively manage the vendor are included.
Ensure that the bank has a current contract on file for all third-party vendors and that the bank monitors key dates (e.g., maturity, renewal, adjustment periods).
Review a sample of contracts with significant vendors to ensure that the contracts satisfactorily address:
The scope of the arrangement, including the frequency, content, and format of services provided by each party.
Outsourcing notifications or approvals required, if the vendor proposes to subcontract a service to another party.
All costs and compensation, including any incentives.
Performance standards, including when and if standards can be adjusted, and the consequences of failing to meet those standards.
Reporting and MIS requirements.
Data ownership and access.
Appropriate privacy and confidentiality restrictions.
Requirements for compliance with all applicable laws and regulations, including safety and soundness regulatory standards, and laws prohibiting lending discrimination and unfair or deceptive practices.
Where brokers and dealers are used in the loan origination process, requirements that the brokers and dealers make best efforts to ensure that the loans offered to borrowers are consistent with their needs, objectives, and financial situation.
Mandatory vendor control functions such as quality assurance and audit, including requirements for submitting audit results to the bank.
Expectations and responsibilities for business resumption and contingency plans.
Responsibility for consumer complaint resolution and associated reporting to the bank.
Vendor financial statement submission requirements.
Appropriate dispute resolution, liability, recourse, penalty, indemnification, and termination clauses.
The authority for the bank to perform on-site vendor reviews. Note: Third-party performance of services is also subject to OCC examination oversight if warranted.
Determine whether the bank’s monitoring of vendors’ adherence to their contracts (especially to financial terms and performance standards) is adequate in frequency and scope.
Determine whether issues identified through the monitoring process are appropriately resolved in a timely manner.
Assess the adequacy of the monitoring process for significant vendors.
Using the sample of significant vendors reviewed in procedure 5(b), confirm that the bank’s oversight incorporates, at a minimum:
Reports evidencing the third party’s performance relative to service level agreements and other contract provisions.
Customer complaints and resolutions for the services and products outsourced.
Third-party financial statements and audit reports.
Compliance with applicable laws and regulations.
Evaluate whether the process results in an accurate determination of whether contractual terms and conditions are being met, and whether any revisions to service-level agreements or other terms are needed.
Verify whether management documents and follows up on performance, operational, or compliance problems and whether the documentation and follow-ups are timely and effective.
Determine whether the relationship manager or other bank staff periodically meets with its vendors to discuss performance and operational issues.
Determine whether vendor management administers call monitoring, mystery shopper, customer call back, or customer satisfaction programs, if appropriate.
Assess the adequacy of the bank’s process for determining when on-site reviews are warranted, the scope of those reviews, and reporting of results.
Determine whether management evaluates the third party’s ongoing ability to perform the contracted functions in a satisfactory manner based on performance and financial condition.
For brokers, dealers, and other third-party loan originators:
Assess the adequacy of the process used to qualify third-party loan originators.
Assess the adequacy of the reports and tracking mechanisms in place to monitor performance (e.g., volume of applications submitted, approved, and booked, quality, exceptions, and loan performance) and relationship profitability, including performance and profitability compared with projections.
Assess the adequacy of the process used to monitor compliance with the bank’s lending policies.
Verify that management maintains a watch list for problematic originators and that actions taken (including termination of the relationship, if warranted) are appropriate and timely.
Assess the adequacy of the content, accuracy, and distribution of vendor management program reports.
Determine whether the bank has any loans to the third party and whether any conflicts of interest exist.
Determine whether any insiders have relationships with the third parties used by the bank and whether any potential conflicts of interest exist (e.g., insider has ownership interests, officer or board positions, or loans to the third party).
Determine whether the bank is involved in any significant third-party relationships where deficiencies in management expertise and/or controls result in the failure to adequately identify and manage the associated risk. If so, consult the EIC and the supervisory office and determine whether it is appropriate to require that the activity be suspended pending satisfactory corrective action.
Develop conclusions with respect to the extent of third-party involvement in retail lending activities and the effectiveness of management’s third-party oversight and risk management processes. Clearly document all findings.
Debt Suspension and Cancellation
Objective: Assess the bank’s debt suspension and cancellation programs, and determine the implications for income as well as credit quality, program performance, and level of compliance.
These procedures should be completed if debt suspension and cancellation products have significantly penetrated the loan portfolio or shown substantial growth or plans for growth. The term “debt waiver” is used throughout the procedures below to describe these programs, regardless of whether a principal reduction is involved.
Determine whether the bank offers any type of debt suspension and cancellation products. If so, determine the retail credit products eligible for debt waiver programs (e.g., credit card, automobile, and home equity).
Determine program features and assess the adequacy of those features and whether they are accurately described in the marketing and the disclosures of terms and conditions provided to bank customers.
Determine whether marketing and promotional materials comply with 12 CFR 37.6(e).
Assess the adequacy of the policies, procedures, and practices in place for each debt waiver product or program. Test adherence to bank guidance and 12 CFR 37 by reviewing a sample of at least 30 approved and 30 denied claims.
Assess compliance with 12 CFR 37. Determine that the bank:
Does not extend credit or alter the terms or conditions of credit conditioned upon the customer entering into a debt cancellation contract or debt suspension agreement [12 CFR 37.3(a)].
Does not engage in any practice or use any advertisement that could mislead or otherwise cause a reasonable person to reach an erroneous belief with respect to information that must be disclosed [12 CFR 37.3(b)].
Does not offer debt cancellation contracts or debt suspension agreements that give the bank the right to unilaterally modify the contract or agreement unless, (i) the modification is favorable to the consumer without additional charge, or (ii) the customer is notified of the proposed change and given a reasonable opportunity to cancel the contract without penalty before the change becomes effective [12 CFR 37.3(c)(1)].
Does not offer debt cancellation contracts or debt suspension agreements that require a lump sum, single payment for the contract or agreement payable at the outset of the contract when the debt subject to the contract is a residential mortgage loan [12 CFR 37.3(c)(2)].
Does not provide customers a no-refund debt cancellation contract or debt suspension agreement unless also offering a comparable product that provides for a refund of any unearned fees paid for the contract if the contract is terminated [12 CFR 37.4(a)].
Obtains a customer’s written acknowledgement to purchase a contract and written acknowledgement that the customer received the long form disclosures [12 CFR 37.7(a)].
If the bank sells a contract over the telephone:
Maintains sufficient documentation to show that the customer received the short form disclosures and affirmatively elected to purchase a contract or agreement [12 CFR 37.7(b)(1)].
Mails the affirmative written election and written acknowledgement together with the long form disclosures to the customer within 3 business days after the telephone solicitation and maintains sufficient documentation to show it made reasonable efforts to obtain the documents from the customer [12 CFR 37.7(b)(2)].
Permits the customer to cancel the purchase of the contract or agreement without penalty within 30 days after the bank has mailed the long form disclosures to the customer [12 CFR 37.7(b)(3)].
If a contact is solicited through written materials and the bank only provides the short form disclosures:
Mails the acknowledgement of receipt of disclosures, together with the long form disclosures, to the customer within 3 business day, beginning on the first business day after the customer contracts the bank or otherwise responds to the solicitation [12 CFR 37.7(c)].
Receives the customer’s written acknowledgment of receipt of disclosures, unless the bank:
Maintains sufficient documentation to show that it provided the acknowledgement of receipt of disclosures to the customer [12 CFR 37.7(c)(1)].
Maintains sufficient documentation to show it made reasonable efforts to obtain from the customer a written acknowledgement of receipt of the long form disclosures [12 CFR 37.7(c)(2)].
Permits the customer to cancel the purchase of the contract or agreement without penalty within 30 days after the bank has mailed the long form disclosures to the customer [12 CFR 37.7(c)(3)].
Select a sample of terminated debt cancellation contracts and debt suspension agreements to determine that the bank [12 CFR 37.4(a)]:
Refunded to the customer any unearned fees paid unless the contract provides otherwise [12 CFR 37.4(a)].
Calculates the amount of refund using a method at least as favorable to the customer as the actuarial method [12 CFR 37.4(b)].
Through discussions with lending officers and a review of the bank’s training program, determine whether personnel provide and are trained to provide:
Short form disclosures orally at the time the bank first solicits the purchase of a contract [12 CFR 37.6(c)(1).
Long form disclosures in writing before the customer completes the purchase of the contract [12 CFR 37.6(c)(2)].
Long form disclosure in writing to the customer if the initial solicitation is in person [12 CFR 37.6(c)(2)].
Short form disclosures orally to the customer and mail long form disclosures, and a copy of the contract, if appropriate, to the customer within 3 business days after a customer solicits for the contract by telephone [12 CFR 37.6(c)(3)].
Long form disclosures that are mailed to the customer on the first business day after a customer responds to a mail insert or “take one” application [12 CFR 37.6(c)(4)].
Disclosures, if provided through electronic media, that are consistent with the Electronic Signatures in Global and national Commerce Act (15 USC 7001, et seq.) requirements [12 CFR 37.6(c)(5)].
Ensure that the bank complies with the disclosure requirements of 12 CFR 37, Debt Cancellation Contracts and Debt Suspension Agreements, by completing appendix E, “Debt Suspension Agreement and Debt Cancellation Contract Forms and Disclosure Worksheet.”
Assess the quality of the MIS used to monitor and administer debt waiver programs. At a minimum, the bank’s monthly debt waiver program reports should be sufficient to accurately ascertain:
Enrollment volume and trends, including:
Number and account balances of accounts enrolled in the program.
Cancellation rate, segmented by customer versus bank closure.
Application and activation volume and trends, including:
Average claim processing time, by type.
Benefit application, approval, decline, and fallout [19] rates.
Number and account balances of accounts in benefit status.
Average duration of benefit period by type and aging of active benefits (time to benefit exhaustion).
Delinquency status of accounts in active benefit status, by type.
Performance of accounts subsequent to benefit denial, fallout, and benefit exhaustion.
Profitability, including:
Fee income generated.
Average annual percentage rate of enrolled and activated accounts.
Costs, including retroactive adjustments, of active benefits, by type.
Evaluate the quality and frequency of the debt waiver analyses performed:
Determine whether management analyzes the performance of accounts. Confirm that the analysis includes the performance of accounts, by type of benefit claimed (e.g., unemployment, medical), for accounts:
Denied claims.
Failing to complete claims after notifying the bank.
Subsequent to benefit expiration.
Determine whether the accounts in 10(a) perform differently than the rest of the respective portfolio. If so, ensure that the performance difference is appropriately incorporated into the allowance analysis.
Confirm the bank’s analysis by reviewing a sample of accounts that came off benefits six months ago. Determine the current payment status of those accounts.
Determine whether the bank administers debt waiver programs in-house, or if they are outsourced to an affiliate or third party. If they are outsourced, review the governing contract, costs, and the controls in place to monitor performance.
Evaluate the accounting and profitability of the program:
Determine the bank’s accounting for debt waiver income and expenses.
Ensure that the bank maintains an adequate reserve for claims benefits, if applicable.
Assess the significance of debt waiver income to the bank’s total income, and evaluate income sustainability in view of program volume, claims experience, and cancellation rates, at a minimum.
If the program is offered for accounts that are securitized, determine the bank’s responsibility for income sharing and claims payments and review the supporting accounting entries. Confirm that trust reimbursements are accurate and timely.
Complete appendix F, “Debt Suspension and Cancellation Product Information Worksheet,” and retain a copy in the examination work papers.
Develop conclusions with respect to the bank’s debt suspension and cancellation programs, including management and administration, and the implications for income as well as credit quality, program performance, and level of compliance.
Overdraft Programs
Objective: Ensure that credit risk related to overdrafts and overdraft programs is appropriately identified, managed, and reported, and that overdraft losses are recognized in a timely manner.
The following procedures should be used when the bank offers overdraft protection to customers through either:
Traditional overdraft accommodations. A traditional overdraft accommodation is overdraft approval that is not communicated or marketed to the customer. Such accommodations may have a manual or an automated approval process.
Marketed, advised-line overdraft protection. These programs inform customers that overdraft protection is a feature of their account and promote the use of the service. Institutions also inform consumers of their aggregate dollar limit of protection under the program. Coverage is automatic for customers who meet the institution’s criteria.
If the bank administers an overdraft line of credit program where the line amount is based on the customer’s ability to repay, refer to the other applicable supplemental procedures.
Examiners should refer to OCC Interpretive Letter #914 and any subsequent OCC or FFIEC issuances for additional guidance on matters associated with overdraft products.
Determine the program(s) offered, and whether developed and administered internally or externally.
Review the characteristics of the program, including marketing practices, advertising, and customer disclosures.
Ascertain the criteria applied to qualify accounts for overdraft programs.
Determine how overdraft limits are established and the consistency of those limits for similar accounts.
Assess the adequacy of the bank’s policies and procedures for overdrafts. Policies should address:
Account eligibility, including minimum average balance required and minimum age of the account (number of months open) requirements.
Criteria for paying overdraft or debit items.
Overdraft limits for different types of deposit accounts, including dollar limits (amount of individual overdraft items and amount of cumulative overdraft items) and item limits (number of overdraft items).
Guidelines on suspending overdraft privileges (usually when the customer has maintained an overdraft balance for “X” number of days).
Exception approval and monitoring for overdraft limits and suspension guidelines.
Criteria for canceling participation in the overdraft protection privileges, e.g., charge-off of an overdraft balance.
Circumstances under which the overdraft protection, if a feature of the account, will be reactivated for accounts suspended or canceled.
Criteria for establishing a payment plan for an overdraft, if the bank offers a payment plan option.
Charge-off requirements and accounting treatment.
Monitoring requirements.
If the bank uses a third-party overdraft protection program, assess the rationale behind management’s decision to use a third-party provider, and ascertain whether the bank conducted an appropriate due diligence review. In addition, obtain a copy of the contract between the bank and provider and review the terms for adequacy. Specifically:
Identify the role of the third party, including the services and support provided.
Assess the reasonableness of the compensation agreement. If there are any income-sharing provisions, ensure that they are equitable and that the third-party provider shares in not only the benefits but also the costs (e.g., participates in credit losses, receives less income).
Ensure that the contract includes reasonable right to cancel, and that termination clauses are not one-sided in the vendor’s behalf.
Ensure that the contract includes requirements for the regular and timely submission of the vendor’s financial information and, if the vendor is involved with the ongoing administration or servicing of the product, that it provides the bank with the ability to audit the vendor at will.
Review the bank’s overdraft aging report and loss trends on its overdraft programs, and verify that management has established reasonable loss recognition guidelines. Overdrafts should generally be charged off within 60 days after the date the account first went into overdraft status. Direct the charge-off of stale items, as appropriate.
If the bank uses repayment plans to allow customers a longer term to pay off their overdraft, ensure that the accounts are not carried on the books beyond 60 days from the date of the overdraft. The accounts should be charged off and the subsequent plan payments treated as an allowance recovery. Direct the charge-off of stale items, as appropriate.
Verify that the amount provided to the allowance for overdrafts is appropriate based upon the loss history for this activity adjusted for any recent changes to underwriting and program terms.
Review the bank’s Reports of Condition and Income to ensure that the bank is treating the asset and any losses appropriately. Specifically, confirm that:
The overdraft balances are treated as “Other Consumer Loans” on Schedule RC-C.
If the institution advises the customer of the available amount of overdraft protection, the unused amounts are reported as unused commitments on Schedule RC-L.
Principal losses and recoveries related to these accounts go through the Allowance for Loan and Lease Losses and are shown on RI-B.
Losses associated with fees are reversed against the income account in which originally recognized (if in the same accounting period) or charged against a loss allowance for uncollectible fees. [20]
Ascertain whether the bank has appropriate overdraft tracking and reporting systems and whether management regularly monitors and analyzes that information, including:
Usage rate of the product as a percentage of eligible deposit accounts.
Timeliness of overdraft repayment.
Charges and fees per account and as a percentage of average balance.
Losses as a percentage of overdrafts, by number of accounts and dollars.
In drawing conclusions about the bank’s overdraft-related practices, document whether credit risk related to overdraft programs is appropriately identified, managed, and reported and whether overdraft losses are recognized in a timely manner.
Previous: Procedures
Next: Verification Procedures