Regular reviews of your commercial loan portfolio are key for prudent risk management, and can help to reveal weaknesses in commercial lending operations. So what should you look for when planning a portfolio review? CUBG’s experts provide these tips on what you need to meet credit risk management guidelines.
Use a third-party reviewer
Examiners are paying close attention to portfolio reviews, and many lenders retain an independent, third-party firm for these engagements. This ensures the review is performed with objectivity and no conflict of interest and helps bring industry best practices and expertise to bear.
Experience is key
Your credit union should seek a qualified and reputable specialist with extensive experience conducting portfolio reviews to perform an independent review of your loan portfolio. Request that potential candidates provide their level of experience, references, and a sample of past work to help ensure a high-quality review project.
Select an appropriate scope
The scope of your portfolio review is important and should represent a diverse cross-section to provide an accurate representation of the overall portfolio.
The review should include:
- Loans to the 10 largest borrowers as percent of credit union net worth and other large balance loans
- Loans with higher risk indicators such as industry risk or those lacking personal guarantees
- Loans approved as exceptions to policy
- Past due, nonaccrual, renewed, and restructured loans
- Loans previously adversely classified and all loans rated Watch or worse
- Loans to insiders or related parties
- Loans constituting concentrations of credit risk per your policy or concentration limits
- A sample of smaller balance loans, newer loans granted in the last 24 months and new loan products that the credit union has recently developed
The depth of the review should adequately represent the portfolio
Similar to the scope, the depth of the review should be appropriate for your credit union based on the complexity of your loan portfolio. A comprehensive review should evaluate various criteria including credit quality and underwriting, and analyze the effectiveness of account management and credit mitigation strategies. The review needs to cover the adequacy and adherence to internal policies and procedures, the quality of underwriting and risk identification, and compliance with laws and regulations.
Consider including an operations review
Including a review of your core policy, procedures, and your credit union’s internal commercial lending operations can also help you make the most of your portfolio review. Problems discovered during the portfolio review could bring systematic issues in loan underwriting and analysis procedures to light.
Operation reviews should focus on ensuring the credit union has a strong foundation for addressing the risks associated with commercial lending. This includes a review and critique of the commercial loan origination, servicing, and portfolio management processes, including a review of the following key areas:
- Sufficiency and completeness of business loan policies and procedures
- Initial underwriting and the credit presentation format and contents
- The methodology, components, and accuracy of the risk rating system
- The annual review process
- Management and Board reporting
Use your reviewer’s recommendations to ensure compliance with regulatory guidance, prudent commercial lending underwriting standards, and best practices in the credit union industry.
Schedule a portfolio review annually
Having an independent loan review completed annually is considered an industry best practice. This can help reveal weaknesses in loan operations or structural risks like consistent violations of internal policy and procedures.
Use the review wisely
The review report is a useful tool for your credit union. After the review, the report should be carefully examined for action items that need to be addressed within your policy, procedures, and loan files. Identify any deficiencies and weaknesses and set a time period they should be corrected and resolved. It is also important to communicate the results of the review, any follow up actions, and the status of the portfolio to both management and your Board of Directors. A good addition to your annual portfolio review process is to re-read your previous reports before your next review.
