Though up to this point, attempts at an official definition of subprime' had been criticized for being impracticably vague, the regulators' most recent stab far surpasses those that came before it, in terms of clarity.
The document, compiled by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, was released last week.
"This is guidance for examiners which is a lot better than a one-sizefits-all regulation," said Owen Carney, president of Bank Capital Markets Consulting. "I am surprised they didn't do this several years ago."
The provisions define subprime borrowers as those who exhibit characters that may include:
*Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months;
*Judgment, foreclosure, repossession, or charge-off in the prior 24 months;
*Bankruptcy in the last 5 years;
*Relatively high default probability as evidenced by, for example, a credit bureau risk score (FICO) of 660 or below (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood; and/or
*Debt service-to-income ratio of 50% or greater, or otherwise limited ability to cover family living expenses after deducting total monthly debt-service requirements from monthly income.
"It is clear that this is a take no prisoners' notice to the industry," Carney said.
Still marginally critical, he noted that the application of these guidelines depends on individual examiner interpretation, and is still subject to many variables.
"The guidelines should not be much of a problem for large well managed banks doing a modest amount of subprime lending," he added. "On the other hand the guidelines will undoubtedly exact a big price from securitization driven small banks specializing in subprime lending. They will probably be forced to sell to big banks or finance companies."
Carney will sit on a panel this week on the impact of risk-based capital on securitization. Also on the panel: Thomas Boemino, senior supervisory financial analyst at the Federal Reserve; Michael Brosnan, deputy controller, risk evaluation, at the OCC; David Katz, partner at the law firm Orrick, Herrington & Sutcliffe; and John Tierney, a director at Deutsche Bank.