WASHINGTON David Bochnowski, chairman and chief executive officer of Peoples Bank in Munster, Ind., never thought of it as a subprime lender until he read the definition that federal regulators gave to examiners in guidelines issued last month.
Now Mr. Bochnowski is worried that $400 million-asset Peoples may face higher capital requirements and tighter regulatory oversight because of its loan portfolio, though he has worked hard to stay out of the subprime business.
Weve prided ourselves on what we thought was staying above subprime loans, but when we look at our portfolio, we have scores below the regulators threshold, said Mr. Bochnowski, who is also chairman of Americas Community Bankers.
The guidelines, which were released Jan. 31 by the bank and thrift regulators to mixed reviews from the banking industry, have fast been attracting more critics. They argue that the regulators defined subprime lending too broadly, instituted extremely high capital requirements, and disguised a burdensome new regulation as nonbinding recommendations.
I read it as a stealth rule, said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting firm that has some subprime lender clients. I dont think these are guidelines. It sets a specific standard definition of subprime and adds new capital requirements and new loan-loss reserve standards. None of this is the type of policy ordinarily set in guidance.
Regulators responded that the guidelines are flexible and allow examiners to decide on a case-by-case basis whether to step up oversight or increase capital.
We tried to recognize the different nature of activities and products out there in the subprime market, said Scott Albinson, managing director in the supervision division of the Office of Thrift Supervision. It would be difficult to do that in a rulemaking. A rule provides bright lines of demarcation.
But even some of those industry representatives who at first were pleased that the agencies had opted for guidelines have now changed their minds. Paul Smith, senior counsel with the American Bankers Association, said the association is planning to write a protest letter to the agencies.
Were concerned they appear to have simply raised the capital requirement with examiner guidance, Mr. Smith said. The more we read it, the more it looks like they have made a change in risk-based capital with guidance and that isnt the way you do it.
Top lawmakers are expected to weigh in, too. A spokeswoman for Senate Banking Committee Chairman Phil Gramm said that his office is looking at the guidelines, and he is considering whether to hold hearings. Sen. Gramms overriding concern is that the guidelines dont cut off peoples access to credit, the spokeswoman said.
The guidelines offered the most extensive definition of subprime programs to date. Subprime portfolios were defined as those made up of loans to borrowers with higher-risk characteristics, including: a Fair, Isaac & Co. score of 660 or lower or an equivalent credit rating; two or more 30-day delinquencies in the past year; and bankruptcy in the last five years.
If a banks subprime assets equal 25% or more of its Tier 1 capital, examiners are instructed to require it to hold capital that is one-and-a-half to three times higher than that typically set aside for prime assets.
The credit score provision has become the center of the protest over the guidelines. Many observers say the number is far too high.
I approved a loan yesterday for a young professional who is just starting out, and he had a credit score of 670, Mr. Bochnowski said. Under this guidance, he is awfully close to being considered subprime, and there is no way I would consider that subprime by any stretch of the imagination.
Ms. Petrous firm estimated that about 40% of borrowers in the consumer retail market had Fair, Isaac scores of 660 or below, which puts them within the definition of subprime. Critics also said that 30-day delinquencies are fairly common in the prime market.
Mr. Bochnowski said that he worries that though the guidelines are intended to target only lenders with high concentrations of subprime loans, overly aggressive examiners could force him to hold higher capital and loan-loss reserves.
We dont have a program for subprime lending, but we may end up profiling as if we do, he said. Then it becomes a subjective question, and the outcome could vary from examiner to examiner.
He and other industry officials predict the new definition could inaccurately label many regular lenders as subprime and force some banks or thrifts to rein in their credit to the same moderate- and low-income applicants that policymakers are demanding they serve.
This could take people out of the mortgage market, said Diane Casey, president of Americas Community Bankers, who stated her groups concerns in a recent letter to regulators. The guidance would stigmatize certain borrowers and take certain qualified borrowers out of availability for mortgage loans.
Mr. Albinson said such fears are unwarranted. This guidance is only applicable for institutions that are programmatic subprime lenders they have to have a separate program crafted to lend to subprime borrowers, he said. Just about every bank makes loans that could fall into one or more of the characteristics of the guidelines, and that is not whom this guidance applies to.
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