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Credit unions want and need to make more profitable loans. Regulators are demanding more management control of lending strategies and want credit union executives to strengthen their risk management and lending practices.
With credit risk increasing, especially with the weak economy, falling real estate values, and high unemployment, can credit unions make more loans with the regulators asking for tighter guidelines? The answer is yes.
Credit union executives have all of the information to satisfy both challenges. You can utilize your own business intelligence through key analytics and tools to find new strategies for making more profitable loans and satisfy the examiners at the same time. Your own portfolios can tell you all you need to know to be successful.
As credit unions continue to face ever-changing challenges in their lending programs, with regulatory oversight escalating around key lookout points such as Concentration Risk, Credit Migration, Interest Rate Management, and Indirect Lending practices, credit union executives must be more sophisticated on how they manage these risks.
Given the fact that most credit unions have complex portfolios requiring considerable expertise to manage, analyze, and implement solid risk management practices, it is now more important to get the business intelligence embedded within your portfolios through simplified analytical and monitoring tools.
The key to good risk management and lending strategies starts with the right people receiving timely and accurate data.
There are “Best Practices“ your credit union should implement that will help manage your credit risks, identify potential problems, and satisfy regulatory concerns, while also pointing out areas for additional loan opportunities.
Static Pool Analysis
Static Pool Analysis is based on the actual performance of a pool of loans that originated with the same underwriting criteria during the same time period. It provides current and historical performance of the specific pool of loans and can provide key measures affecting overall portfolio yield. Not only is historical trend data a more predictive analysis of future behavior, it also provides an effective means of monitoring the impact of time sensitive or operational changes or course corrections.
Predicting performance on the lending guidelines for each static pool of loans allows proactive course corrections to be made for current resource allocations and sets future strategies to improve performance.
Credit Score Migration And Portfolio Reviews
In an unstable economic environment, your members' credit risk rating can change quickly. Members who find themselves unemployed/underemployed will change their buying and payment behaviors. These changes can have an impact on the quality of loan portfolios and leave your credit union at risk of loss. Portfolio reviews provide a current snapshot of the overall risk distribution.
Most loan portfolios also have a specific range of credit risk where these members are quite profitable. By repeating the credit score migration process at frequent intervals, either quarterly or semi-annually, you can better identify the risk changes and improvement trends to determine additional loan opportunities.
Unlike a one-time analysis, portfolio reviews use a credit score migration program over time that can track and identify changes in your risk composition that impact your loan growth and profitability either adversely or positively. Trends in growth for the higher scoring members could identify overly conservative underwriting standards, which may lead to lower returns on the overall portfolio. Whereas increases in the highest risk portion of your portfolio should be a warning that low approval standards within your policies may lead to higher delinquencies and ultimately losses.
Credit unions can utilize this business intelligence in determining where there is an upward trend in their members’ credit scores. These trends may indicate opportunities to increase credit lines or offer additional loan products thereby improving profitability.
Interest Rate Management: Risk-Based Pricing And Scorecard Validation
The darkest cloud on the horizon and a major concern with the regulators is interest rate management. The question is not if interest rates will increase, but when. With a historic run of low interest rates and loan portfolios loading up with these low rate borrowers, have credit unions developed appropriate strategies and risk management techniques to deal with the upcoming storm?
As part of a fully documented and monitored lending strategy, concentration risk reports are key to protecting your credit union from hidden risks within product portfolios. Using these reports enables quick determination if your loan portfolio is growing the way you intended by showing the product and sub-product mix as well as the credit risk within each product. These reports also provide details on where you may have concentration risks in your interest rate tiers.
Two other strategies that will help keep the ship moving in the right direction include performing validations on your credit scorecard and risk-based pricing models.
Most credit unions have employed some type of credit scoring model to help with the underwriting process. You rely on that “score” to help approve the loans and set the interest rates based upon the stated risk of that scorecard provider. You are paying for those scores to insure you are making loans within the tolerances your credit union is willing to take. How do you know if those scores are providing the protection you are paying for? Have you ever confirmed that your portfolio is performing the way the score model said it would?
Equally important to validating your scorecard is the accurate construction of risk based pricing tiers. If your risk-based pricing model is not delivering the expected results, it may affect revenue and ultimately the profitability of your portfolios. A “best practice” is to complete a validation on your risk based pricing model at least every six months.
Lending Insights provides key analytics and reporting tools that help credit unions make more profitable loans, while meeting regulatory requirements. Lending Insights helps credit unions easily view and understand all aspects of their loan portfolios for timely and strategic decisions.
To learn more about how Lending Insights can support and enhance your lending program, contact Mike James at 877-262-3680, ext. 704, or firstname.lastname@example.org, or visit www.lendinginsights.com.
September 26, 2011
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