A Strong Loan Review System Is Good For Your Credit Union Business

Credit and loan risk

Regulators see an effective loan review system as essential to the efforts of credit unions to meet safety and soundness standards. In fact, banking regulators are issuing updated guidance on loan or credit risk review systems as a stand-alone document (rather than as part of the guidance related to the allowance for credit losses. as is currently the case) to underline their importance in the broader risk. management efforts.

But beyond facilitating reviewer scrutiny, is a strong loan review system good for your credit union’s business?

Effective credit risk review promotes lending agility

Absolutely, according to Ancin Cooley, director of Synergy Credit Union Consulting. Cooley is a former Examiner with the Office of the Currency Comptroller who provides loan reviews, outsourced credit analysis, strategic planning, and risk appetite advice. A strong loan review function is especially important in helping credit unions be nimble, as he explained in the recent “Best Practices for Credit Analysts in Credit Unions” webinar.

Being able to move quickly is a business advantage. This is true whether a credit union is aiming to take loans with a certain type of risk or a higher probability of default, or is trying to move away from a certain type of loan or risk.

“When you have a strong loan review process, you’ll know issues that arise in your portfolio faster,” Cooley said. “And you’ll be able to react to market changes faster without worrying about having ‘bombs’ waiting in your wallet.” Instead, he said, your credit union sentiment is more likely to be, “Hey, we’ve got an amazing loan review team, what if [a bomb] was there, they will find it.

Objectives of effective credit risk review systems

The Interagency Guidance on Credit Risk Review Systems Project indicates that early identification of what Cooley called “bombs” is one of the seven goals of an effective credit risk review system. credit. The guidelines state that an effective credit risk review system should identify “loans with actual and potential credit weaknesses so that timely action can be taken to strengthen credit quality and minimize losses”.

Other goals outlined in the guide, many of which also support business goals, are:

  • Validate and, if necessary, adjust risk ratings, in particular for loans with potential or well-defined credit weaknesses;
  • Identify relevant trends affecting the quality of the loan portfolio and highlight segments likely to be problematic;
  • Assess the adequacy and compliance with internal credit policies and loan administration procedures, and monitor compliance with applicable laws and regulations;
  • Assess the compliance of loan staff with loan policies and the quality of their loan approval, monitoring and risk assessment;
  • Provide management and the board of directors with an objective, independent and timely assessment of the overall quality of the loan portfolio; and
  • Provide management with accurate and timely information about the credit quality it can use for financial and regulatory reporting, including determining the allowance for loan and rental losses or the allowance for credit losses.

Keys to Effective Loan Review

The keys to an effective loan review function, Cooley told the webinar, are independence, sufficient stature of the loan reviewer to speak to the senior lender as a peer, and adequate funding. for training, as well as hiring and retaining strong executives. loan examiners.

The proposed guidelines do not explicitly say that the credit risk review function is good for the business of a credit union. However, many credit unions derive a significant portion of their income from loans. In addition, credit is a major source of risk for most credit unions. So it makes sense that a strong credit risk review function helps protect the credit union from a significant impact on the organization.

The Credit Risk Review, as directed, assesses a credit union’s large loans, loan products, or groups of loans “at least annually, upon renewal, or more frequently when factors internal or external indicate a potential deterioration in credit quality or the existence of one or more other risk factors. The credit risk review also serves, in a sense, as a monitoring system. “The credit risk review function can also provide useful ongoing feedback on the effectiveness of the lending process to identify any emerging issues,” the guide says.

In addition to protecting against credit risk, an effective loan review can protect a credit union against other risks, including liquidity risk, strategic risk, compliance risk, and reputational risk. Each of these risks can affect a fund’s net income:

  • Liquidity risk: The credit review process helps guard against cash flow surprises that may have a corresponding effect on the balance sheet.
  • Strategic risk: Problematic loans and portfolios can alter a credit union’s plans for resource allocation and new products.
  • Compliance and reputation risk: An independent credit review function provides oversight that prevents exposure to remedies, fines, civil monetary penalties, and damaged reputation.

Certainly a strong credit risk review function is important to satisfy reviewers. However, creating a strong, well-funded, independent loan review function can also benefit your business.

Mary ellen biery

Mary Ellen Biery is a senior writer and content specialist for Abrigo in Austin, Texas.

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