In today’s fast-paced financial services world, credit unions must run efficiently. Unfortunately, with the urgency of day-to-day operations taking precedent, it’s all too easy to let reviews of the loan portfolio slide to the end of the year and become a box to check for compliance.
However, overlooking the valuable data that comes from these reviews means missing out on information the credit union could use for operational and origination planning. Instead of scrambling once a year, if credit unions take the right steps, they can make the process less painful and gain strategic insights.
CU QUICK FACTS
Great Lakes Credit Union
HQ: Bannockburn, IL
Data as of 12.31.16
12-MO SHARE GROWTH: 2.7%
12-MO LOAN GROWTH: 21.0%
“Loan reviews are critical to the portfolio and risk management of GLCU’s commercial portfolio,” says Eric Vessel, vice president of commercial lending at Great Lakes Credit Union ($767.3M, Bannockburn, IL). “They allow us to gauge the accuracy of our loan risk ratings and the overall operational effectiveness of the credit union’s risk-rating processes and procedures.”
Indeed, the loan review can be an important safety tool as well as a compliance requirement, says Pam Easley, CEO of Extensia Financial, the nation’s largest CUSO dedicated to member business lending and advisory services. Easley encourages credit unions to adopt the mindset that the loan review can be part of a proactive management and risk program.
“Analyzing the data that is coming in is just as important as meeting the compliance requirements,” Easley says.
So, what steps can credit unions take to make the most of loan reviews and the data they return?
No. 1. Have A Methodology To Regularly Evaluate Loans
Rather than evaluating the portfolio in one lump sum at the end of the year, plan to review it regularly throughout the year. Review loans based on the date they close and use each review period to gather new information about the loan.
“The most successful credit unions are those that evaluate loans based on when the loan closes rather than waiting until the end of the year to perform a requirement,” Easley says.
Loan reviews allow us to evaluate the effectiveness of our policies and procedures, our service providers and business partners, and our employees.
For commercial real estate loans, specifically, Easley recommends property check-ups to ensure the real estate is being maintained properly. She also suggests gathering financial statements from the borrower as well as from tenants, depending on the property type.
As part of its loan review, Great Lakes Credit Union measures the financial strength of the guarantor and their ability to support the loan as required. It also uses market data to help determine the strength or weakness of the loans.
Finally, keep all that information in a database or knowledge center that several people, not just the person doing the review, can access. This gives everyone, including the chief financial and lending officers, the ability to stay on top of information and see how individual loans as well as the portfolio are faring. It also allows the credit union to more transparently track changes to reporting models — an important consideration in a loan review as these changes can impact the standing of borrowers as well as affect the coming year’s approval rates, Easley says.
No. 2. Make Loan Reviews A Part Of Risk Management
Loan analysis allows the credit union to determine if there are events or variables that are increasing risk in the portfolio. In this way, the loan review isn’t just a regulatory requirement, it’s an early warning tool to detect possibly problematic loans.
“We constantly review loans and communicate with the borrowers and with folks who know something about the property to learn whether we should be concerned about something or where there's improvement,” Easley says.
Loan reviews are helpful not only for risk management but also for detecting major industry changes. Changes in profit and loss statements and loan-to-value ratios might indicate an economic downturn that could affect the rest of the credit union’s business. And if changes are positive, then the credit union might want to take on more risk.
That’s how Great Lakes Credit Union sees it. According to Vesell, data from the credit union’s loan reviews allows it to manage concentrations, analyze trends, and adjust loan structures and requirements on future transactions. But that’s not all.
“Loan reviews allow us to evaluate the effectiveness of our policies and procedures, our service providers and business partners, and our employees,” Vesell says.
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No 3. Consider A Partnership
Depending on the size and complexity of the portfolio, credit unions can manage loan reviews themselves or they can use a supplier that provides the annual loan review as part of the overall service to customers.
Great Lakes Credit Union uses a third party to review all the transactions initiated through its originations team. If that review identifies a loan as risky, then Great Lakes has a third-party underwriter review the loan.
“Think about how big the portfolio is and the resources the credit union has,” Easley advises. “Third parties can conduct reviews as well as help the credit union interpret what all the data means.”