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OCC BULLETIN 2012-6
To: Chief Executive Officers of All National Banks, and Federal Savings Associations, Department and Division Heads, All Examining Personnel, and Other Interested Parties

Description: Guidance on Junior Liens

On January 31, 2012, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency (collectively, the agencies) issued Interagency Supervisory Guidance on Allowance for Loan and Lease Losses (ALLL) Estimation Practices for Loans and Lines of Credit Secured by Junior Liens on 1-4 Family Residential Properties (Junior Liens).

This guidance reiterates key concepts included in generally accepted accounting principles (GAAP) and existing ALLL supervisory guidance related to the ALLL and loss estimation practices. Institutions also are reminded to follow appropriate risk management principles in managing junior lien loans and lines of credit, including OCC Bulletin 2005-22, Interagency Credit Risk Management Guidance for Home Equity Lending.

Current market conditions have contributed to a continued scrutiny of Junior Liens and the adequacy of the related ALLL. The guidance focuses on two primary concepts for financial institutions with significant Junior Lien portfolios.  First, the guidance focuses on understanding the performance and modification status of senior liens associated with the institution’s Junior Lien portfolios.  Second, the guidance reinforces the need for institutions to appropriately segment their loan portfolio based on common risk characteristics and factors.  Adequate segmentation within their junior lien portfolio assists in estimating appropriate allowances for high risk segments within the portfolio.

For further information, please contact the Office of the Chief Accountant at (202) 649-6280 or Credit and Market Risk at (202) 649-6360.


Kathy Murphy
Chief Accountant


Darrin Benhart
Deputy Comptroller, Credit & Market Risk

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