Risk Management

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Risk Management


I. Why

Regulators and Boards of Directors of banks and credit unions are asking institutions to contract with reputable third party firms to provide loan review services. This is true even if the institution has an existing loan review function. Institutions need that third party perspective and insight into the appropriateness of the bank or credit union’s:

  • Loan policies and procedures
     

  • Credit administration procedures including the application and timeliness of updating risk ratings, monitoring construction loans, performing annual reviews, and conducting site inspection to confirm the estimated market value and the physical condition of collateral pledged against loans  
     

  • The quality of the information provided to the Board of Directors and senior management to evaluate the inherent risk of the institution’s loan portfolio
     

  • Pricing of loans
     

  • Methodology used in calculating the Allowance for Loan and Lease Losses (ALLL)
     

  • The staffing levels and methods used to compensate and incentivize loans officers

 

The loan review should include reviewing enough lending relationships to obtain 35% to 50% coverage of the total dollar amount of commercial, commercial real estate, and agricultural loans outstanding. Depending on the size of the institution this normally can be accomplished by reviewing 30, 60, or 100 lending relationships. We say relationship versus loan because we always look at all loans held by a selected customer.

Regulators like to see that every loan relationships has a chance of being selected so the sample needs to include both smaller and larger relationships. For each lending relationship selected the review will include examining the contents of the loan file and possibly meeting with the assigned loan officer to determine whether the:

  • Loan file contains the documents and other information required and is being managed in accordance with the Bank’s loan policy and sound underwriting and credit administration practices within the banking or  credit union industries;
     

  • Risk rating and if applicable, any specific reserve, assigned or allocated to the loan is appropriate.
     

  • Loan complies with all applicable lending laws and regulations.

 

III. Consumer Loans

For consumer loans the focus is more on ensuring that the institution is adhering to its lending policies and procedures when the loan was originated. Depending on the size of the bank or credit union a sample size of 30 to 60 loan should be sufficient for a review of the consumer loan portfolio.  For each consumer loan selected, we examine the contents of the loan file and determine whether the:

  • Loan file included the documents and other information required by the institution’s loan policy and was in compliance with the lender’s underwriting criteria for the given type of loan.
     

  • Loan complies with applicable lending laws and regulations.

 

IV. Customized Reports

At the end of our review we will issue a written report detailing any recommended risk rating or specific reserve adjustments we identified. We will also provide you with a list of any technical exceptions or violations of lending laws or regulations identified in our review. We will ask management to provide us with a written response to any findings which we will include in the report.

We will also issue a management letter listing any best practice recommendations that we may have. These recommendations are not implying that what you are doing is wrong. They are instead our recommendations on how you may reduce the risk or improve the efficiency or profitability of your lending operations. We like to include these matters in a separate letter because these letters are not typically shared with regulators.

 

V. Differentiators

What separates our firm apart from the competition is that our loan review staff have

  • In excess of 25 years of commercial lending and loan review experience.
     

  • Our loan review consultants have extensive experience performing profit improvement and operational review studies for clients. They will bring that experience to the table to provide your institution with valuable ideas on how to improve the profitability and risk management function within your lending department.
     

  • Provided consulting services to the Federal Deposit Insurance Corporation (FDIC) and other banking and credit union regulatory parties therefore, have a vast amount of knowledge of what the regulators want and expect from financial institutions and lending staff.

 

VI. More Services

In addition to proving loan review services we also provide the following services

  • Development of loan policies and procedures manuals.
     

  • Creation of risk rating matrixes to use in assigning risk grades to commercial or consumer loans.
     

  • Development of pricing model to be used setting interest rates for consumer or commercial loans.
     

  • Provide assistance in adopting the Current Expected Credit Loss accounting standard that will be effective for determining the balance needed in the allowance for loan and lease losses.   
     

  • Provide various training courses to loan officers, loan processors, or Boards of Directors on effective lending policies and procedures.