Magazine article American Banker

In a First, FDIC Warns Banks about Dangers of Subprime Lending

Magazine article American Banker

In a First, FDIC Warns Banks about Dangers of Subprime Lending

Article excerpt

The Federal Deposit Insurance Corp. has become the first agency to officially warn banks about the risks posed by subprime lending.

In a May 2 letter made public late Friday, FDIC Director of Supervision Nicholas J. Ketcha Jr. said subprime lending had produced "substantial losses that have had a pronounced negative impact on the overall financial condition of some institutions."

His letter to the chief executive officers of 6,300 state-chartered banks defines subprime lending's risks and outlines the controls regulators expect bankers to exercise.

Subprime lending-loans to consumers with incomplete or tarnished credit histories-is burgeoning because it can produce good returns and fat servicing fees. But as Mr. Ketcha reminded the 6,500 state-charted banks he oversees, "this profit potential is accompanied by significant risks."

The No. 1 danger is default, he said.

Foreclosure rates are hitting 30% or more at some financial institutions, Eric Schmidt, an assistant director in the FDIC's supervision division, said Monday. "That's a huge number," he said, noting the concerns that credit card chargeoff rates of 5% have generated.

Mr. Schmidt said roughly a dozen institutions had lost enough money on subprime lending that their Camel performance rating had been downgraded by the agency. The losses are serious enough at a "handful" of institutions that they have been added to the FDIC's problem list, he said.

"We're not saying not do it," he said. …

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