Panel Advocates Better Internal Controls on Loan-Loss Allowances
For example, said credit union consultant and panelist Mike Sacher, lending departments might not be communicating information about restructured loans to accounting departments, throwing off the numbers.
Panelist Bryan Mogensen, who is with Clinton Gunderson LLP, added that collection staff might take liberties with system access and change due dates or rates without authorization or notice.
"Restrictions collections to 'view only' on your system is one way to go," he said.
Patelco Credit Union Chief Financial Officer Scott Waite agreed internal controls are crucial for accurate loan-loss allowances. He suggested placing an accounting employee in the collections department or vice versa to ensure both departments realize what each other requires.
Sacher also suggested credit unions update their loan-allowance policy as a proactive defense against questions from auditors and examiners. The process to determine loan-loss allowances is half art and half science, he said, so the policy must show that the board has reviewed the methodology and determined it to be complete.
"Maybe the examiner doesn't agree with your answer," Sacher said. "In that case, challenge him or her to show you what's wrong with your policy."
If a credit union's policy is correct and has been correctly applied, it's tough to argue the number is wrong, he said, which "takes the wind out of their sails."
Loan-level reviews were also discussed by the panel, with all agreeing that the practice is crucial. Sacher asked how many in the audience have or are obtaining refreshed FICO scores and updated loan-to-value figures for all mortgage loans. Only about half of the room raised their hands.
Sacher said loan-file reviews can reveal loans that don't look impaired at first glance but should be. The opposite can also be true, he said. However, even a loan-by-loan analysis can't produce unquestionably accurate loan-loss allowance figures.
"As accountants, we're used to a very high degree of precision," Sacher said. "We have to be willing to guess and reduce our expectation of precision. A good guess is better than no guess at all."
Sacher continued the allowance discussion Wednesday morning in a standing-room-only session. The CPA presented specific allowance scenarios.