Capital Increase reserves (to a 200% risk-based capital charge) against subprime receivables, characterized by the agencies as below-660 FICO loans. Increase capital to cover the Accrued Interest Residual (AIR) by yearend. These two changes are implementations of recent guidance by the regulators around subprime lending and the AIR, which apply to all banks.

Allowance for Loan Losses Maintain sufficient loan loss reserves against subprime assets to cover 12 months of future losses.

Finance Charge and Fee Reserve Maintain reserves against uncollectible finance charges and fees.

Policies, Procedures, Systems, and Control Enhance the enterprise risk management systems and internal controls, which have not kept pace with recent growth. This refers to technology, information systems, formal documentation (rather than credit risk management).

Source: Lehman Brothers fixed-income research market commentary (7/17/02)

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