FFIEC is Clamping Down on
Card Issuer Accounting

Soaring losses at credit card specialists such as Providian and Metris has prompted the federal banking regulators to re-assess accounting standards related to credit card account management and loss reserves. Although the credit quality problems that made headlines last year were almost exclusively confined to card issuers specializing in the subprime market, the new regulations will likely impact all card issuers. The interagency Federal Financial Institutions Examination Council (consisting of the OCC, Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of Thrift Supervision) are drafting new standards that will affect credit line management, over-limit accounts, loan-loss reserves for current accounts, reserves for uncollectable fees and finance charges, and the classification and ability to re-age accounts in workouts and settlements. The new standards may or may not be issued for public comment prior to implementation.

Regulators are concerned about the lack of uniform account management standards across the industry. Among the changes being considered are

• New requirements for loan-loss reserves that would require issuers to hold reserves against the uncollectable portion of fee and finance charge income,

• Higher minimum payments for borrowers who exceed their credit limits to cover the full amount of over-limit fees and the excess balance,

• Tighter restrictions on accounts in workout programs, including a reduction in the number of times such accounts can be re-aged in a five-year period,

• Accelerated charge-off of the uncollectable balance on accounts which have entered into settlement agreements.