Ann Thomas

1RC-C Loan Coding

CALL REPORT PREPARATION

RC-C Loan Coding andRC-R Risk Weighting of Loans

Presented by Ann Thomas

athomas@thomasconsult.net

This webinar is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal or accounting services. If legal or accounting advice is required, it is recommended that each financial institution consult its own attorney or accountant. This material may not be reproduced without written permission of Thomas Consulting.

CALL REPORT PREPARATON RC-C LOAN CODING & RISK WEIGHTING

TABLE OF CONTENTS

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RC-C, Loan Coding Schedule 3Classification Priority, Lease Financing & Loans to Municipalities 5Classification Priority, Real Estate Secured 6Classification Priority, Loans to Certain Borrowers 20Classification Priority, Loans by Purpose 22Classification Priority, Other Loans 27

RC-C Coding Examples 28

RC-L, Unused Commitments & Letters of Credit 32

RC-R, Risk Weighting of On Balance Sheet Loans 38

RC-R, Risk Weighting of Off Balance Sheet Commitments 53

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2RC-C Loan Coding

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3RC-C Loan Coding

SCHEDULE RC-C PART 1 LOANS & LEASES

Classification Priority:

� RC-C 10, Lease Financing Receivable� Property acquired by the bank for leasing purposes

• 10a, consumer

• 10b, all other

� RC-C 8, Loans to States & Political Subdivisions� Include:

• real estate secured

• unplanned OD’s

• Indian tribes are considered a state & political subdivision5

Loans, Classification Priority

� RCC 1, Loans Secured by Real Estate Collateral

� Definition of Real Estate Secured loans

• consider primary collateral; do not consider real estate taken in abundance of caution unless bank gives more preferential terms because of additional real estate

• value of real estate collateral (excluding any senior debt) must be greater than 50% of the principal amount of the loan at origination in order to be considered secured by real estate

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4RC-C Loan Coding

Loans, Classification Priority

RC-C 1, Loans Secured by Real Estate Definition of Real Estate secured

• Example 1, loan amount $200,000, collateral value $225,000– Real estate secured because collateral value is more than $100,000

• Example 2, 2nd lien loan $100,000, collateral value $150,000, first lien amount $90,000

– Real estate secured because net collateral ($60,000) value is more than $50,000

• Example 3, $700,000 loan secured by real estate and equipment; real estate value $340,000, equipment value $360,000

– Would NOT be coded as real estate secured because collateral value is less than $350,000 (1/2 of loan amount)

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Loans, Classification Priority

RC-C 1, Loans Secured by Real Estate Definition of Real Estate secured

• Example 4, two loans on same day, $25,000 line of credit and a $125,000 term loan ; loans will be cross-collateralized by equipment with an estimated value of $40,000 and a third lien on the borrower’s residence, which has an estimated value of $140,000 and first and second liens with unpaid balances payable to other lenders totaling $126,000; the two loans should be considered together to determine whether they are secured by real estate.

– Would NOT be reported as secured by real estate. Remaining real estate collateral value is $14,000, which is less than 50% of loan origination amounts 8

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5RC-C Loan Coding

Loans, Classification Priority

RC-C 1, Loans Secured by Real Estate Definition of Real Estate secured

• Example 5, $10,000 home equity line of credit secured by a junior lien on a 1-4 property; bank also has a loan to the same borrower that is secured by a first lien on the same 1-4 property; unpaid principal balance is $71,000. The estimated value of the property at origination of the home equity line of credit is $75,000. Consider 2 loans together.

– Would be reported as secured by real estate. Real estate collateral value greater than 50% of loan origination amounts (consider existing plus new)

– Would NOT be reported as secured by real estate if another bank held the 1st

lien. Remaining real estate collateral value of $4000 is less than 50% of new loan amount.

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Loans, Classification Priority

� RCC 1, Loans Secured by Real Estate � RCC 1a, Construction, Land Development, & Vacant

Land

� Construction is new construction as well as alternations or additions to existing property

� Loans written as combination construction-permanent loans secured by real estate should be reported in this item until construction is completed or principal amortization payments begin, whichever comes first. When the first of these events occurs, the loans should begin to be reported in the real estate loan category appropriate to the real estate collateral

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6RC-C Loan Coding

Loans, Classification Priority

� RCC 1, Loans Secured by Real Estate � RCC 1a, Construction , Land Development , Vacant

Land

• a combination construction-permanent loan arises when the lender enters into a contractual agreement with the original borrower at the time the construction loan is originated to also provide the original borrower with permanent financing that amortizes principal after construction is completed and a certificate of occupancy is obtained (if applicable)

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Loans, Classification Priority

� RCC 1, Loans Secured by Real Estate � RCC 1a, Construction , Land Development , Vacant

Land

• is intended to apply to situations where, at the time the construction loan is originated, the original borrower:– is expected to be the owner-occupant of the property upon

completion of construction & receipt of a certificate of occupancy (if applicable), for example, where the financing is being provided to the original borrower for the construction and permanent financing of the borrower’s residence or place of business, or

– is not expected to be the owner-occupant of the property, but repayment of the permanent loan will be derived from rental income associated with the property being constructed after receipt of a certificate of occupancy (if applicable) rather than from the sale of the property being constructed

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7RC-C Loan Coding

Loans, Classification Priority

� RCC 1, Loans Secured by Real Estate

� RCC 1a1, 1-4 Construction

Does not include 1-4 vacant land loans unless same loan finances the 1-4 construction

Includes loans:• to developers secured by land for 1-4 construction

• to individuals for 1-4 construction

• Loans secured by manufactured housing

• Loans secured by duplex units or townhouses

• Combination construction-perm loans until construction is complete or principal amortization payments begin

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Loans, Classification Priority� RCC 1, Loans Secured by Real Estate

� RCC 1a1, 1-4 Construction

Includes:• Combination land & construction loans on 1-4 family residential

properties, regardless of the current stage of construction or development

• Loans secured by apartment buildings undergoing conversion to condominiums, regardless of the extent of planned construction or renovation, where repayment will come from sales of individual condominium dwelling units, which are 1-4 family residential properties

• Bridge loans to developers on 1-4 property where the buyer will not assume the same loan, even if construction complete or amortization has begun

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8RC-C Loan Coding

Loans, Classification Priority

RCC 1a, Construction, land development, vacant land

• RCC 1a2, All other construction, land development, & vacant land loans:

– construction loans other than for 1-4 properties

– land development loans

– loans secured by vacant land unless the land is used or could be used for farmland

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Loans, Classification Priority� RCC 1, Loans Secured by Real Estate

� RCC 1a2, All other construction, land development, vacant land • Continue to report as construction, even after construction is completed

unless and until the loan is financed into permanent loan, the bank acquires physical possession of underlying collateral, or the loan is charged off.

– A loan is deemed to be refinanced into a new permanent loan only if the bank:

» originates a loan to a new borrower who has purchased the real property, or

» has made a prudently underwritten new amortizing permanent loan at market value terms to the original borrower, including an appropriate interest rate, maturity, and LTV ratio, that is no longer dependent on the sale of the property for repayment

» should have clearly identified ongoing source of repayment sufficient to service the required P&I over a reasonable and customary period relative to the type of property securing the loan

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9RC-C Loan Coding

Loans, Classification Priority

� RCC 1, Loans Secured by Real Estate � RCC 1b, Secured by Farmland (Used or Useable)

� RCC 1c, Secured by 1-4 residential• 1. RCC 1c1, open-end

• 2. RCC 1c2, closed-enda. RCC 1c2a, First liens

b. RCC 1c2b, Junior liens

� RCC 1d, Secured by multi-family residential• Housing 5 or more on a fairly permanent basis

• Primarily apartment buildings 17

Loans, Classification Priority

� RCC 1, Loans Secured by Real Estate

� RCC 1e1, Secured by Owner Occupied non-farm, non-residential loans

� RCC 1e2, Secured by Non-owner occupied non-farm, non-residential loans

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10RC-C Loan Coding

Owner Occupied Non-farm, Non-residential

� Determination made at origination

� Once determined don’t need to review again

� Primary source for repayment is cash flow from ongoing operations of property owner or an affiliate rather than rental income (< 50%) or permanent financing of property

� Payments from hospitals, golf courses, recreational facilities, churches, & car washes are not “rents”

� Payments from hotels, dorms, nursing homes, assisted living facilities, & storage facilities ARE “rents”

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Loans, Classification Priority

Loans to Certain Borrowers

� RCC 2, Depository Institutions

� RCC 3, Farmers (exclude security loans, non-farm commercial)� all agricultural purpose loans, whether made to farm

& ranch owner or non-farmer

� all other loans made to farmers

� RCC 7, Foreign Governments 20

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11RC-C Loan Coding

Loans, Classification PriorityLoans to Certain Borrowers

� RC-C 9a, Non-depository financial institutions � Non-real estate loans to insurance, finance, factoring,

mortgage, or holding companies, REITS, federally sponsored lending agencies (FHLB, FHLMC, Federal Intermediate Credit Banks, Federal Land Banks, the Federal National Mortgage Association, & the Student Loan Marketing Association)

� RC-C 9b/9b2, Nonprofit organizations� Non-real estate secured loans to churches, hospitals,

educational & charitable institutions, clubs, similar associations 21

Loans, Classification PriorityLoans based on Purpose� RCC 4, Commercial Business

� Non-real estate secured business loans

� If > $300 in assets, report commercial loans to US and non-US addresses in column A

• Domicile is determined by the principal residence address of an individual or the principal business address of a corporation, partnership, or sole proprietorship

• Consider only principal address, even if other addresses are used for correspondence or other purposes

• US addresses include residents of the 50 states of the United States, the District of Columbia, Puerto Rico, and U.S. territories and possessions

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12RC-C Loan Coding

Loans, Classification Priority

Loans based on Purpose� RCC 6, Individual, Family, Personal Expenditure

� RCC 6a, Credit Cards

� RCC 6b, Other Revolving • bounce protection, if meets definition

– contractually binding

– disclose pay up to dollar amount & not discretionary

� RCC 6c, Automobile � RCC 6d, All Other Consumer

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Loans, Classification Priority

RCC 6c, Automobile Loans

� Include:� Consumer purpose loans to purchase passenger

cars, minivans, vans, sport utility vehicles, trucks, and similar light trucks for personal use

� Secured or unsecured as long as purpose is to purchase auto

� Includes renewals & refinances as long as original purpose was to purchase consumer auto

� Report mixed purpose loans based on primary purpose

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13RC-C Loan Coding

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Loans, Classification Priority

RCC 6c, Automobile Loans

� Exclude:� personal cash loans secured by cars already paid for

� loans for commercial vehicles

� auto loans to farmers if car is to be used for the operations or maintenance of farm

� loans for farm equipment

� auto lease financing

� fleet sales

� motorcycles, RV’s, golf carts

Loans, Classification Priority

Loans based on Purpose� RCC 6, Individual, Family, Personal Expenditure

� RCC 6d, All Other Consumer • Vacation, debt consolidation, non real estate secured

home improvement, medical bills, wedding expenses

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14RC-C Loan Coding

Loans, Classification Priority

RCC 9, Other Loans� RCC 9b/9b1, For purchasing or holding securities

� Does not have to be collateralized by security

� RCC 9b/9b2, Unplanned Overdrafts of Individuals or Businesses

� RCC 9b/9b2, Individuals for Investment � Not real estate secured or investment in own business

� RCC 11, Unearned interest & deferred fees27

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15RC-C Loan Coding

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16RC-C Loan Coding

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17RC-C Loan Coding

RC-L, Unused Commitments

� Unused commitments include:

� Commitments to make or purchase loans

� Commitments where you’ve charged a commitment fee

� Commitments that are legally binding

� Proceeds you are legally obligated to advance:

• Loan draws, construction progress payments, seasonal advances to farmers under prearranged lines

� Rotating, revolving open end lines

� Overdraft protection, where have advised customer of available amount 33

RC-L, Unused Commitments

� Unused commitments:

� Commitments to issue a commitment at some point in the future, where the bank has extended terms, the borrower has accepted the offered terms, and the extension and acceptance of the terms:

� (a) Are in writing, regardless of whether they are legally binding on the bank and the borrower, or

� (b) If not in writing, are legally binding on the bank and the borrower, even though the related loan agreement has not yet been signed and even if the commitment to issue a commitment is revocable, provided any revocation has not yet taken effect as of the report date

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18RC-C Loan Coding

RC-L, Unused Commitments

� Unused commitments:

� Report unused commitments gross, but if would not be legally obligated to fund under any circumstances report net of part sold

� For asset based commitments, report based on amount bank is obligated to lend as of report date

• difference between lesser of:– contractual borrowing base or note commitment

and sum of outstanding loans under commitment

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19RC-C Loan Coding

SCHEDULE RC-L 2, LETTERS OF CREDIT

Item 2

� Financial Standby Letters of Credit� Bank pays when purchaser fails to pay

Item 3

� Performance Standby Letters of Credit� Bank pays when purchaser fails to perform

Item 4

� Commercial Letters of Credit� Bank pays when transaction is consummated as agreed

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20RC-C Loan Coding

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21RC-C Loan Coding

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Report loans on RCR in one of four categories:

• residential mortgage exposures

• high volatility commercial real estate (HVCRE)

• past due 90+ or nonaccrual

• all other loans

� RCR 4, Loans held for sale

� RCR 5, Portfolio loans� Exclude any that qualify as securitization exposures (report in RCR 9)

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22RC-C Loan Coding

� RCR 4a or 5a, Residential mortgage exposures� Exclude presold construction loans

� Include:

• loans secured by first or junior lien, or

• loan with an original & outstanding amount of < $1 million that is primarily secured by first or junior lien on non 1-4 property (multifamily) and is managed as part of a segment of exposures with homogeneous risk characteristics and not on an individual basis

– include above two categories even if past due 90+ or nonaccrual

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� RCR 4a or 5a, Residential mortgage exposures

� Include:

• statutory multifamily loans– meet LTV guidelines of 80% or 75% if rate changes over loan term

– are not past due 90+ days or nonaccrual

– Annual net operating income to required debt servicing of 120% (115% if variable rate) during most recent fiscal year

– Maximum amortization period of 30 years

– Minimum original maturity of 7 years

– Demonstrated timely repayment performance for 12 months; if refinance may consider repayment performance at prior bank

� Col G, 20% risk

• Guaranteed portion of FHA & VA mortgage loans reported in RCC 1c

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23RC-C Loan Coding

� RCR 4a or 5a, Residential mortgage exposures

� Col H, 50% risk

• 1-4 1st liens on RCC 1c, if prudently underwritten– meet LTV guidelines of 90%

» may include PMI in LTV calculation

– not 90+ days past due or nonaccrual

– have not been restructured or modified, unless under the Treasury’s home affordable mortgage program

» if modify without updated credit review, will not qualify for 50% risk

– may include 1-4 junior lien if also hold the 1st lien and there are no intervening liens

• residential mortgage multifamily loans reported in RCC 1d that qualify for 50% risk (< $1 million)

– 1st lien

– Not 90+ days past due or nonaccrual

– Have not been restructured

• statutory multifamily loans reported in RCC 1d (must meet criteria)45

� RCR 4a or 5a, Residential mortgage exposures� Exclude presold construction loans

� Col I, 100% risk

• 1-4 first liens past due 90+ days or on nonaccrual

• 1-4 junior liens not qualifying for 50% risk

• Residential mortgage multifamily loans (< $1 million) past due 90+ days or on nonaccrual

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24RC-C Loan Coding

� RCR 4b or 5b, High volatility commercial real estate exposures (HVCRE)

� Includes HVCRE loans that are past due 90+ days or on nonaccrual

� HVCRE are loans that finance the acquisition, development, or construction of real property unless the loan finances:

• 1-4 residential properties

• real property that would qualify as an investment in community development

– affordable housing for low/moderate income individuals

– community services for low/moderate income individuals

– revitalized or stabilizes low/moderate income areas, designated disaster areas, or underserved areas

– doesn’t have to be in bank’s CRA area

• purchase or development of ag land (land used or usable for ag) provided the value is based on its value for ag purposes, not value based on any potential use of land for non-ag commercial or residential development 47

� RCR 4b or 5b, High volatility commercial real estate exposures (HVCRE)

� HVCRE are loans that finance the acquisition, development, or construction of real property unless the loan finances:

• commercial real estate projects where:– “as completed” loan to value is < 80% (75% if land development)

– borrower has contributed capital in form of cash or unencumbered readily marketable asset or has paid out of pocket development expenses of at least 15% of as completed value

– borrower contribution must be before bank advances funds and contribution remains in project throughout life of project

– life of project ends when loan is converted to permanent, is sold, or is paid in full

» permanent financing may be provided by the bank that provided the ADC facility as long as the permanent financing is subject to the bank’s underwriting criteria for long term mortgage loans

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25RC-C Loan Coding

� RCR 4b or 5b, High volatility commercial real estate exposures (HVCRE)

� Col J, 150% risk• HVCRE loans, current and past due 90+ days, nonaccrual (unless

collateral or guarantor would qualify for lower risk)

� Most HVCRE loans will be in RC-C 1a2, but could also be in RC-C 1d or 1e if mini perm or bridge loan to a customer who is waiting for permanent financing

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� RCR 4c or 5c, Loans past due 90+ days or on nonaccrual

� Exclude residential loans, HVCRE

� Col C, 0% risk

• Portion of loans secured by cash

� Col C, 20% risk

• Portion of loans guaranteed by US government, including FDIC loss sharing agreements

� Col J, 150% risk

• All other loans past due 90+ days or on nonaccrual

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26RC-C Loan Coding

� RCR 4d or 5d, All other loans� Col C, 0% Risk

� portion of loans with unconditional guarantee

� SBA guaranteed portion purchased

� cash collateral in your bank

� loans secured by treasury or GNMA bond to extent of fair value discounted by 20%

� Col G, 20% Risk

• guaranteed portion of SBA loans originated

• government guaranteed portion of student or farm loans

• cash collateral in another financial institution if have perfected first lien interest

• municipal loans if repayment from general tax receipts

• loans covered by loss sharing agreements with FDIC

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� RCR 4d or 5d, All other loans

� Col H, 50% Risk

• presold construction loans to builders– meet LTV guidelines of 80%

– cannot be past due 90+ days or on nonaccrual

– must be presold with documented contract and loan commitment

– must be owner occupied; cannot include spec homes

• municipal loans if repayment from revenues

� Col I, 100% Risk

• all other loans not qualifying for lower risk weighting

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27RC-C Loan Coding

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� RCR 10, Off balance sheet securitization exposures� If not a repo-style transaction or eligible margin loan, cleared

transaction (other than credit derivative), or over the counter derivative (other than credit derivative), the exposure amount is the notional amount of the exposure

• if bank makes a credit enhancing representation & warranty that is limited or capped (warranty to cover first losses on loans up to set amount that is less than full loan amount)

– ex. bank sells $100,000 in 1-4 loans and agrees to compensate buyer up to $2,000 if loans default in first 12 months

» since 12 months longer than 120 day period meet definition of credit enhancement

» securitization because $2,000 is a first loss tranche on a $100,000 transaction

» report $100,000 in Col A, adjustment of $98,000 in Col B, $2,000 in Col Q if applying 1250% risk or Col T if applying the SSFA approach or Col U if applying the gross up approach

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28RC-C Loan Coding

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� RCR 12, Financial standby letters of credit� Col A -- report amount from RCL 2, unless credit enhancement for

assets (if so, multiply by 12.5%)

� Col B – credit converted at 100%, so report amount from Col A

� Col C – 0% risk, report cash secured to extent of cash on deposit

� Col G – 20% risk, ones conveyed to US banks

� Col I – 100%, all others unless must be risk weighted by country risk classification methodology

� RCR 13, Performance standby letters of credit� Col A -- report amount from RCL 3

� Col B – credit converted at 50%, so report ½ of amount from Col A

� Col C – 0% risk, report cash secured to extent of cash on deposit

� Col G – 20% risk, ones conveyed to US banks

� Col I – 100%, all others unless must be risk weighted by country risk classification methodology 56

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29RC-C Loan Coding

� RCR 14, Commercial letters of credit� Col A -- report amount from RCL 4 that have an original maturity of <

1 year

• if original maturity > 1 year, report on RCR 18c

� Col B – credit converted at 20%, so report 1/5 of amount from Col A

� Col C – 0% risk, report cash secured to extent of cash on deposit

� Col G – 20% risk, ones conveyed to US banks

� Col I – 100%, all others unless must be risk weighted by country risk classification methodology

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30RC-C Loan Coding

� RCR 17, All other off-balance sheet liabilities� Include:

• notional amount of all other off balance sheet items reported in RCL 9

• full amount of loans sold with credit-enhancing representations and warranties that do not meet definition of a securitization exposure

– if agree to repurchase loans, report until warranties expire

– credit enhancing representations & warranties do not include certain early default clauses and similar warranties that permit return of, or premium refund clauses covering 1-4 loans provided the warranty period does not exceed 120 days from the date of transfer

• notional amount of written option contracts that act as financial guarantees that do not meet definition of securitization

• Col B – credit converted at 100%, so report amount from Col A

• Col C-J – risk weight based on counterparties who meet or have guarantees or collateral that meets the various risk categories 59

� RCR 18, Unused commitments� Exclude commitments that are unconditionally cancelable (bank may

cancel at any time for any reason)

� Must be a legally binding commitment; RC-L may include commitments that are not legally binding

� Only include the bank’s pro rata share of the commitment

� RCR 18a, Original maturities < 1 year excluding asset backed

commercial paper conduits (ABCP)

• Col B -- credit converted at 20%; report 20% of Col A amount

• Col C-J – report based on risk category collateral or guarantee qualifies for

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31RC-C Loan Coding

� RCR 18, Unused commitments

� RCR 18c, Original maturities > 1 year

� include commercial letters of credit with original maturities of > 1 year

� Col B -- credit converted at 50%; report 50% of Col A amount

� Col C-J – report based on risk category that the collateral or guarantee qualifies for

� "Original maturity" is defined as the length of time between the date a commitment is issued and the date of maturity,

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RC-R 18

� Unused commitments:

� "Original maturity" is also the earliest date on which the bank

� (1) is scheduled to (and as a normal practice actually does) review the facility to determine whether or not it should be extended and

� (2) can unconditionally cancel the commitment*

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32RC-C Loan Coding

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RC-R 18

� Unused commitments:

� * In the case of consumer home equity or mortgage lines of credit secured by liens on 1-4 family residential properties, a bank is deemed able to unconditionally cancel the commitment if, at its option, it can prohibit additional extensions of credit, reduce the credit line, and terminate the commitment to the full extent permitted by relevant federal law.

� Retail credit cards and related plans, including overdraft checking plans and overdraft protection programs, are defined to be short-term commitments that should be converted at zero percent and excluded from 18c if the bank has the unconditional right to cancel the line of credit at any time in accordance with applicable law.

� RCR 19, Unconditionally cancelable commitments

� unused commitments unconditionally cancelable at any time by the bank have a 0% credit conversion factor

� a demand clause does not necessarily meet the definition of unconditional

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RC-R 19

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33RC-C Loan Coding

END OF PRESENTATION

THANK YOU FOR PARTICIPATION! 65

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