Five Key Exposures Regulators Will Review
SAN FRANCISCO-Michael E. James of Lending Insights also offered "Five Key Exposures Regulators Will Review."
1. Static Pool Analysis. "This is the most accurate measure of loan performance over time."
2. Concentration Risk. "Do you know the highest pools of risk in your portfolios and within the individual products?"
3. Credit Tier Distribution. "Are you receiving the right mix of credit? With risk-based pricing, when you ask how do you set your pricing model, the common answer is 'I am matching it to my competition. I am setting my strategies according to my competition.' But how would you know unless you set some validation. Many have nice rounded methods to set tiers. Sometimes the other credit unions setting those rates have a lower cost structure than you. Are you matching only to competition, or methodically doing some strategy to establish those tiers. Larger institutions don't use symmetry in setting rates. There is a policy behind it."
4. Interest Rate Risk. "This is the regulators' biggest dark cloud of concern," reminded James. "Do you understand the WAR you are fighting? It's not a matter of if rates will go up; it's a matter of when. Is your risk-based pricing model working? Are your pricing differentials for credit tiers adequately compensating for the risk? If rates change could it make you unprofitable?
5. Credit Portfolio Migration. "Examiners want to see how the risk has shifted in your portfolio since you made the loan," said James. "Member credit scores generally have deteriorated. If that risk has shifted, are you aware of it, and do you have the appropriate staffing and expertise to manage that potential risk? You will also find some members whose scores have gone up, and that can be a good opportunity."