On-Site Coverage: Multi-Dimensional Loan Analysis Can Reveal Hidden Risk
If credit unions don’t properly analyze their loan portfolios for risk, examiners will, Lending Insights Director of Lending Michael Cochrum told a breakout session Friday during the final day of NAFCU’s Annual Conference in Nashville, Tenn.
Cochrum told the story of a credit union that only had 1% overall loan delinquency and high growth in indirect lending. Consequently, the credit union invested considerable resources into growing its indirect lending business.
However, during a regulatory exam, the examiner’s risk analysis revealed a growing delinquency problem in indirect lending and, because the credit union was unaware of the problem, the examiner required it to stop indirect lending until the problem was addressed.
“Who do you want to do your loan analysis?” Cochrum asked. “Because examiners will.”
Proactive credit unions execute multi-dimensional portfolio analysis, which includes regularly grouping loan types together by risk factors such as origination date, credit score, dealer or branch of origination. Most core systems aren’t built to do that type of analysis and traditional risk analysis can miss hidden problems, Cochrum said.
Credit unions that conduct multi-dimensional analysis are prepared when the examiner arrives, and can educate him or her about the problem and the credit union’s plan to mitigate loss, he added.
Examiners have placed an increasing emphasis on loan risk analysis, Cochrum said.
Nearly all of Lending Insights’ 80 new credit union clients from the past two years have approached the vendor with a phone call starting with ‘our examiner just left,’ Cochrum said. “It’s no longer acceptable to tell an examiner, ‘I didn’t know.’”
Loan risk analysis can also safeguard credit unions from being too conservative in guarding against risk, he said.
“Most of us were hired to make loans, not do risk analysis on the portfolio,” he said. “It takes away from your job when you have to do this work, so hopefully we can talk to you about how to do it efficiently and not suffer ‘paralysis by analysis.’”