Highlighted by the Office of the Comptroller of the Currency's settlement with the banking subsidiaries of Advanta Corp., the regulators are kicking up their regulatory prowess with regard to risk treatment of subprime lending banks, sources said.
The OCC asked that Advanta make a few significant changes, such as shortening delinquency advancing periods and tightening delinquency reporting procedures - though neither will impact the performance of Advanta's outstanding paper.
One source familiar with the situation said that the OCC is "using this action to send a message on what it expects bank lenders to do to assure they will not become involved in predatory lending."
Although the enforcement was targeting capital treatment, risk-weighting and risk-soundness, if the regulators were to push similar enforcement on other subprime lending banks, the changes could impact securitization programs and subprime loan liquidity, said one source familiar with the situation.
However, a source at the OCC said that the enforcement action was not a message to the industry but rather an Advanta-specific event.
Regardless, Advanta's lending banks, which were subject to regulatory tightening, have in no way been associated with predatory lending, and its lending practices are widely considered above average, though the recent attention to predatory lending has had the effect of blurring the issues.
"This needs to be clear so that no one will be under the impression that this was precipitated by complaints or lawsuits or something like that," said Yaron Ernst, an analyst at Moody's Investors Service. "What we understand is just the agencies are tightening their procedures overall with respect to the whole market."
As part of the terms of the settlement, the OCC required Advanta's banking subsidiaries to shorten the delinquency advancing period to 180 days from 360 days on certain loans. The delinquency advancing period describes the length of time following a charge-off that the servicer will make up the cash flow from the loan.
"With respect to existing deals, it's going to have zero effect, because the parent, Advanta Mortgage Corp., will continue to do the advancing as before, because it's not a bank and not subject to these regulations," Ernst said.
With Advanta, it's unusually hard to say how the guidelines will reflect future deals, as Advanta recently announced that it is considering the sale of its mortgage operations.
Further, according to Michael Coco, director of securitization at Advanta, "The changes will have absolutely no impact on the liquidity of the loans."
However, for other issuers, if they were to face similar guidelines without a non-banking entity advancing the charge-offs for the full year, the loan could become less liquid, and therefore more difficult to securitize, said an analyst.
Theoretically, this could create a condition where it's more challenging for a subprime lender to stay afloat.
The OCC also required that Advanta shorten the period between delinquency and charge-off to 180 days from 360 days, which will not affect the performance of the securitizations but the reporting, as charge-offs will happen sooner.
A Changing Subprime?
In addition to responding to the imposed restrictions, Advanta, on its own behalf, is said to be tightening its lending and origination operations.
"Tightening standards is absolutely what we're doing," Coco said. "It's part of the whole thrust of the company to increase the margin and profitability of the loans we're originating."
For example, the subprime lender will up its minimum credit criteria for borrowers, according to one source, even as its borrowers' scores are already above the industry average.
"This was not imposed by the agencies, but simply the company is trying to address the overall environment," the source contended.
However Coco said, "Then again the orders [by the OCC] do not have anything to do with underwriting standards, they go to policies, procedures and prophecies."