Regulators Offer New Subprime Definition

In the ongoing debate over subprime loans and predatory lending practices, a working definition of either has been noticeably absent. In early February, Federal banking regulators issued new examination guidelines that further clarify what they view as subprime lending. Subprime portfolios are 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, or one 60-day delinquency in the past two years; bankruptcy in the past 5 years; a debt service-to-income ratio of 50% or greater; and a foreclosure, repossession or chargeoff in the preceding 24 months. New capital guidelines apply to institutions that have subprime asset holdings of 25% of Tier 1 capital or higher. Examiners will require these banks and thrifts to hold capital that is one-and-a-half to three times higher than that typically set aside for prime assets.