Risks of Subprime Lending
March 11, 1999
Circular No. 11142

To the Chief Executive Officers of All State Member Banks, Bank Holding Companies, Edge Corporations, and State-Licensed Branches and Agencies of Foreign Banks, in the Second Federal Reserve District:

Market events over the past year have underscored some of the risks associated with the growing business of subprime lending. This has brought greater attention to the supervisory issues related to banks' involvement in subprime lending and how well these institutions are prepared to manage the unique risks associated with this activity. Institutions engaged in subprime lending need strong risk management practices and internal controls as well as board-approved policies and procedures that appropriately identify, measure, monitor, and control all risks in this activity. Institutions considering or engaging in this type of lending should recognize the additional risks inherent in this activity and determine if these risks are acceptable and controllable, given the institution's staff, financial condition, size, and level of capital support.

In response to this heightened concern, on March 1, 1999, the Federal Reserve System and the other federal banking agencies issued the enclosed "Interagency Guidance on Subprime Lending." This statement seeks to increase awareness among examiners and financial institutions of some of the pitfalls and hazards of this type of lending and to provide general examination guidance on the topic.

If you have any questions, please contact a member of the Financial Examinations portfolio management team responsible for your organization.