by W. Bernard Mason, Regulatory Relations Liasion, Risk Management Association
The Office of Thrift Supervision recently issued a memorandum to thrift institution chief executive officers describing the results of an OTS-conducted “horizontal review” of the allowance for loan and lease losses (ALLL) methodologies at a number of larger institutions. The review included 1-4 family residential first mortgages, Option ARMs, second mortgages, and the related qualitative component of the allowance. OTS stated that the purpose of the review was to identify industry practices, including sound practices, in the ALLL estimation process. The results of the review will be used by OTS examiners as a tool in assessing a thrift institution’s ALLL. The memorandum enumerates several observed “sound practices” for estimating an appropriate ALLL; it also lists several types of deficiencies noted by the review. The memorandum cautions against generalizing these sound practices and points out that ALLL practices must be appropriate to each institution. The complete memorandum (CEO Letter 304) can be found at the following link: http://files.ots.gslsolutions.com/25304.pdf
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