Eight Steps For Improving The Exam Process

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SAN FRANCISCO-No credit union heads into an exam with enthusiasm, but one person is offering an eight-step process for making the process much easier.

And not just easier, said Michel E. James of Lending Insights; those same eight steps can also drive new ROI and cost reduction.

What examiners want to see, according to James, are documented and board-approved risk-management policies and guidelines with effective processes and monitoring controls.

"I want to emphasize board-approved," said James. "They want to see that management and the board are on the same page about the loan portfolio."

Where many credit unions fail, he said, is in identifying risk on a micro-level, such as within the mortgage portfolio. "Do you understand the profitability of each? Do you know where your highest risk pools are," James asked during a session at NAFCU's annual meeting. "They are also looking to see if you have a comprehensive, effective and ongoing due-diligence program to mitigate risks, and I want to emphasize 'ongoing.'"

A related issue, he added, is "timely access to data. Regulators say the issue they continually find is that credit unions don't get the information quickly enough to see trends and fix things and make good decisions."

According to James, the eight steps every credit union should follow to make the examination process go more smoothly are:

1. Documented Risk Management Strategy. Put in place a cohesive set of current and historical performance reports to support strategies. "What that means is the regulator is going to say, 'You have nice guidelines and strategies: why?' You need to provide support. I have sat with loan officers and collectors and asked them about the strategy, and they say, 'What strategy?' The strategy often isn't pushed down to the actual people who manage the strategies for you."

2. Ability to Determine Profitability by Product. "Examiners are also going to want to get down to the tier level," said James.

3. Ability to Determine if Quality of Lending & Collections are Improving or Declining. "They are going to ask you, 'Are they working? Have the collection policy and underwriting changes had the desired effect in reducing delinquency and losses?' "

4. Effective Collection and Loss Prevention Strategies. Stressing the need for "proactive strategies," James shared the story of a credit union Lending Insights worked with that was investing a lot of resources in calling delinquent members when, had it paid attention to the data, the problem could have been resolved by looking at "due dates."

"If you know that the member continues to pay you on the 15th, for instance, and you see it's a consistent payment record even though it's due on the 1st, you might have a due-date problem. We have found that more than 30% of people being called by one credit union had that situation. There is an opportunity here to be proactive in collections."

5. Know The Highest Risk Segments of Your Loan Portfolios (Concentration Risks). "For the highest risk segments what impact will these trends have on the portfolio performance?"

6. Know Which Branches & Dealers Are Responsible For The Highest Levels of Loss and Delinquency. "How can you possibly manage 300 dealers without special, automated tools to do that? Examiners expect you to manage right down to the dealer level so you understand the risks. The same holds true for your branches. Many credit unions allow branches to independently underwrite loans. Are you able to look at those loans by branch and by loan officer?

7. The Right Tools & Analytics In Place To Support Sound Risk-Management Strategies.

8. Getting The Right Information to The Right People At The Right Time. "This is necessary to make quick strategy changes and course corrections. You could be losing out on the right opportunities to correct some potential heartburn."

"If you simply sat down with your team with these eight strategies, you're going to be doing pretty well," said James.

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