News Release 2005-34 | March 21, 2005

Acting Comptroller Williams Highlights Changes in Retail Credit Products and Risks

New Orleans, LA – Acting Comptroller of the Currency Julie L. Williams said today that retail lending has undergone a dramatic transformation in recent years and she urged bankers to respond by altering the way they think about consumer credit and adopting new approaches to managing it.

"It is no longer possible to assess credit risk accurately by using lagging indicators, such as delinquencies and losses, when it has become so much easier for consumers to avoid delinquencies as a result of decreased payment requirements," Ms. Williams said in a speech before the BAI's National Loan Review Conference.

"Because reduced payment requirements and extended amortization arrangements can mask credit risk, loan review professionals need to look at it differently in order to ensure that the risk is defined and managed," Ms. Williams said. "That means developing broader, more discriminating, and more forward looking approaches to measuring and monitoring risk in the retail portfolio."

Ms. Williams said the philosophy of retail lending has changed as much as the mechanics.

"Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset. Thus, today the challenge for lenders is not so much to control the amount of debt that a household can take on, but to find ways to accommodate the debt within each borrower's financial framework. In other words, it's not repayment of the amount of the debt that is the focus, but rather the income the credit relationship generates through periodic payments on the loan, associated fees, and cross-selling opportunities."

As a result, Ms. Williams said, American households are more highly leveraged than ever. Millions of Americans faithfully make minimum payments each month and make little progress in reducing their total debt.

"The practices associated with the new philosophy of retail lending - higher credit limits and loan-to-values, lower minimum payments, more revolving debt, less documentation and verification, and lengthening amortizations - have certainly introduced risk elements not previously present in the banking system," Ms. Williams said.

Ms. Williams urged bankers to look at new ways to measure and monitor risk.

"What that entails is zeroing in on those particular loans that have the highest probability of default," Ms. Williams said. "It means identifying particularly risky borrowers: those with unusually high debt levels and utilization of their credit card lines, and declining credit scores. It means singling out high LTV loans, loans with extensions, renewals, and rewrites; and loans in work-out programs. It means testing transactions to ensure compliance with policies and procedures. It means evaluating whether collection practices are effective, loan reserves are appropriate, and losses are recognized in a timely manner. And it means doing this constantly, consistently."

Ms. Williams said the OCC has already incorporated the changes in retail lending in OCC examination procedures for retail lending issued in December. The goal is to bring OCC supervision into conformity with the changes in retail lending philosophy and to raise awareness of those changes throughout the banking industry.

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