Striking a Balance Between Technology, Resources and Satisfying Regulators

Many credit union leaders are frustrated by the ever-increasing requests from regulators to analyze their loan portfolios.  The challenge has been having the right technology and resources in place to conduct regular analysis of portfolio performance, without consuming resources required to serve the members better.  Many have given in to simply providing the minimal amount of analysis to keep the examiners happy.  As one credit union executive was quoted, “What good is knowing this information if the cow is already out of the barn?”  Perhaps if the benefits of doing this analysis were identified, then it might make more sense to invest in the technology and resources necessary to go beyond what is required, and create analysis that can drive credit union growth and profitability.  Some simple analysis tactics can get the credit union off to a good start.

Portfolio Risk Distribution

The report above illustrates the current balances and percent to total calculations for loans grouped by loan type and risk tier.  A report like this can help credit unions manage risk concentrations in the portfolio.  The report also highlights values in the percent to total column that exceed 25%.  Of course, each credit union is going to have its own tolerances for risk.

Delinquency by Origination Pool and Credit Tier

The above report is part of a static pool analysis.  By grouping loans together by year of origination and risk tier, credit unions are able to see if there are performance issues emerging in various risk categories.  Again, we’ve highlighted any delinquency value in the report that exceeds 1%.

This report enables the credit union to determine where delinquency issues exist – in older loans or newer loans.  In the case above, it’s clear to see that there are some serious delinquency issues with “D” tier loans originated in 2011 and 2012.  It is important to address the loans in that risk category specifically to mitigate potential future losses.  Using a portfolio analysis tool like Lending Insights’ LPMS, the credit union is able to access all the loans in that risk category, both current and delinquent, using drill-through functionality.  In this example, clicking on the 32.18% in the “D” column, the drilldown would send back all the loans originated in 2012 in the “D” tier.  This generates a collections “hotlist.”  Even if the credit union is not using portfolio analysis software, this report certainly provides the information needed to extract a hotlist from the core.

A report like this can also assist the credit union at exam time.  For example, look at the “B” tier loans originated prior to 2010.  All currently have very high delinquencies.  Conversely, the loans originated in “B” tier after 2010 are performing well.  So, when an examiner suggests the credit union has an issue with “B” tier loans and suggests changes in underwriting guidelines, it’s easier to demonstrate that an issue existed, but that the issue has already been resolved through changes in underwriting.

Losses by Origination Pool and Credit Tier

The above Losses by Origination Pool and Credit Tier report uses the same grouping parameters as the delinquency report noted earlier, but the metrics are charge-off rather than delinquency.  Looking at pools of loans identified by origination period allows the credit union to identify strategies in underwriting that may need to be corrected or support corrective changes that have already been made.  In this report, the Cumulative Loss Ratio is the percentage of the origination amount that has been charged off in the lifecycle of the loan pool.  In the case of “A” tier loans originated in 2011, $241,498.46 represents 1.52% of the total amount of loans originated in the “A” tier in 2011.

There are some emerging issues in this portfolio, primarily with loans originated in 2011.  With these loans there is a higher than normal loss ratio for loans that are only a year to a year and a half old.  Also easy to see, is an emerging issue with “A” tier loans originated in 2011 and 2012.  Of course, this is reporting what the credit union may already know.  However, with the ability to drill down and view all the loans in that origination pool, the credit union is better able to manage the performance of the existing loans that have not yet charged off.

Credit unions can use other risk dimensions, such as underwriter, branch, dealer or LTV instead of risk tier, to pinpoint the level of risk that each of these characteristics present in the portfolio.  As a result, fine-tuning underwriting strategies becomes much easier and the results are more predictable.  It’s recommended that credit unions create some standard exam-ready reports that can be run on a monthly basis and reviewed by leadership so that proper and consistent responses can be prepared for the eventual exam, but more importantly, to better manage the portfolio for profitability and growth.

For more information on implementing successful business intelligence and risk management practices, contact Lending Insights’ Michael Cochrum at Michael.Cochrum@lendinginsights.com or by phone at (972) 814-1477.

Michael Cochrum

Michael Cochrum

Michael has worked in the consumer lending industry since 1989. In 1999, he joined the credit union industry, working for the Texas Credit Union League’s credit union. Mr. Cochrum ... Web: www.cudirect.com Details