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The qualitative component of a credit union’s allowance for loan and leases losses (ALLL) is a crucial one. Regardless of the size of a financial institution, a credit union’s qualitative factors (Q factors) assessed for their ALLL has been under increased scrutiny by regulators and auditors since the financial crisis six years ago, and that is likely to be the case for the foreseeable future.
With that increased attention in mind, many credit unions find themselves asking what qualitative factors should be used, and how an adjustment to their ALLL calculation should be documented and supported. In fact, many financial institution professionals consider Q factors to be the most challenging piece of their quarterly ALLL. Unlike the historical analysis that is based on hard data, determining Q factors can be a highly subjective exercise. Additionally, there is limited guidance to help institutions determine what, if any, adjustments should be made for their ALLL calculation or what thresholds to use.
Of the guidance that does exist, the 2006 Interagency Policy Statement is the most frequently referenced. “The nine factors,” as they are commonly referred to, are the closest thing to a “safe bet” institutions can get when trying to limit potential regulatory criticism related to Q factor adjustments. Those nine factors look at both internal, institution considerations, as well as external, environmental factors.
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