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Informational Memorandum
Subject:Credit Underwriting Standards & Portfolio Credit Risk
Date of Memorandum:04/23/1997
Expiration Date:
Signed By:Smith, Roland
FCA Contact Person:Holland, Tom
Contact Phone:703-883-4484
List of Attachments:OCC Advisory Letter 97-3

April 23, 1997

To: The Chief Executive Officer
All Farm Credit System Institutions

From: Roland E. Smith, Director /s/
Office of Examination

Subject: Informational Memorandum--Credit Underwriting Standards and Portfolio Credit Risk Management

The Farm Credit Administration (FCA) is distributing a copy of OCC Advisory Letter 97-3 (AL 97-3), which was recently issued by the Office of the Comptroller of the Currency (OCC). This timely advice to commercial banks, entitled "Credit Underwriting Standards and Portfolio Credit Risk Management," should be read by all credit and lending staff.

In AL 97-3, the OCC expresses concern over evidence of relaxed credit underwriting standards, including underwriting standards applicable to purchased loans and loan syndications. AL 97-3 also highlights major elements of an effective portfolio risk management process. Most lenders have experienced very positive earnings in recent years and competition for loan growth has intensified. A lender that relaxes its credit underwriting standards for the sake of growth must be aware of and be able to adequately measure the increased risk this brings into its loan portfolio. The FCA believes the concepts regarding portfolio risk management that are promoted in AL 97-3 are equally applicable to Farm Credit System institutions.

We encourage you to read and consider the concepts in this document. Further, we encourage dialogue and discussion of this topic and encourage you to contact the Field Office responsible for examinations of your institution if you have questions or comments.