Retail Lending Examination Procedures

Overview

Examiners should perform testing procedures when the examiner-in-charge (EIC) determines that the OCC should verify a bank’s compliance with its own policies and procedures or with regulatory policies, regulations, or laws. The EIC also institutes testing when the OCC should assess the bank’s risk selection, the accuracy of its MIS, or the accuracy of its loan accounting and servicing. Testing procedures should usually be performed periodically on portfolios or targeted segments of the portfolios when there is elevated risk (e.g., subprime lending), an increase in delinquency and loss rates, new lines of business, new acquisition channels, rapid growth, or when loan review or audit is inadequate.

These procedures recommend judgmental sample sizes. The sample size and targeted portfolio segment may be modified to fit the circumstances. The sample selected should be sufficient in size to reach a supportable conclusion. Increase the sample size if questions arise and more evidence is needed to support the conclusion.

Examiners may want to consider using a statistical sampling process for reaching conclusions on an entire portfolio. Performing statistically valid transaction testing on portfolios of homogeneous retail accounts is extremely effective. The benefits of statistical sampling allow the examiner to quantify the results of transaction testing and state with a statistically valid confidence that the results are reliable. For additional information consult the “Sampling Methodologies” booklet of the Comptroller’s Handbook.

Examiners conducting testing should be alert for potential discriminatory, unfair, deceptive abusive, and predatory lending practices (e.g., lending predominantly on the value of collateral rather than the borrower’s ability to service the debt, making high-cost loans, providing misleading disclosures). If weaknesses are found or other concerns arise, 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.”

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