Regulators Release Guidance on Junior Lien Loss Allowances

On Jan. 31, 2012, the four federal financial regulatory agencies, including the National Credit Union Administration (NCUA), issued supervisory guidance on allowance for loan and lease losses (ALLL) estimation practices associated with loans and lines of credit secured by junior liens on one- to four-family residential properties.

The guidance addresses the responsibilities of financial institution management and examiners and builds on existing supervisory guidance for home equity lending and ALLLs.

The guidance is intended to reiterate policy and to remind regulated financial institutions to monitor all credit quality indicators relevant to credit portfolios, including junior liens. Examples of junior liens include second mortgages and home equity lines of credit taken out by mortgage borrowers.

With respect to the ALLL estimation process for an institution’s junior lien portfolio, the guidance says management should:

  • Gather and consider sufficient information to adequately assess the probable loss incurred within junior lien portfolios, including information on the delinquency status of senior lien loans associated with the institution’s junior liens, and whether the senior lien loan has been modified;
  • Ensure adequate segmentation of the junior lien portfolio into groups of loans based on risk characteristics to appropriately estimate allowances for high-risk segments of the portfolio; and
  • Support qualitative or environmental factor adjustments to historical loss rates by an analysis that relates the adjustments to the characteristics of and trends in the individual risk segments within the junior lien portfolio.

The guidance was jointly issued by the NCUA, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

Click here to read the Interagency Supervisory Guidance in its entirety.

Click here to read the NCUA Accounting Bulletin.


Questions? Contact the Compliance Hotline: 1.800.546.4465,

Posted in Compliance News, Federal, NCUA.