Earlier this year, the Federal Deposit Insurance Corporation (FDIC) approved a final rule to implement changes to the deposit insurance assessment system, placing new requirements on how large banks classify and report subprime loan balances. As required by the Dodd-Frank Act, the Large Bank Pricing Rule is an effort to assess higher rates for banks with high-risk asset concentrations.
While banks are currently required to report this information, beginning on April 1, 2012 the FDIC will require large banks — those with $10 billion or more in assets — to use a strict set of criteria to classify subprime loans that they hold. Under the new guidelines, a loan is considered to be subprime if it meets one or more of the following criteria: two or more 30-day delinquencies in the past 12 months or one or more 60-day delinquencies in the past 24 months; judgment, foreclosure, repossession or charge-off in the prior 24 months; bankruptcy in the past five years; or debt service-to-income ratio of 50 percent or greater.
This new rule is a continuation of the changing regulatory environment in which legislators and regulators in Washington are seeking to require lenders to gain a better understanding of their customers. Just as the Federal Reserve’s CARD Act rule required income verification and ability-to-use estimation models, the FDIC’s new rule will require lenders to conduct a robust evaluation of a consumer’s credit risk.
It is imperative that financial institutions required to comply with the Large Bank Pricing Rule have the necessary tools available to conduct the underwriting and risk-assessment processes to ensure compliance.
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