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The importance of appraisal reviews in protecting financial institutions

Written by admin on . Posted in Blog, Risk Management.

By Casey Simpson; consultant and manager of appraisal review services, Young & Associates

In the real estate industry, accurate and unbiased property appraisals are critical. These influence lending decisions, investment strategies, tax assessments and legal outcomes. Appraisal reviews are a safeguard for financial institutions, investors and the public. Additionally, the regulators outlined this process as a requirement.

Accurate and unbiased property appraisals drive critical decisions in lending, investment strategies, tax assessments and legal outcomes. Appraisal reviews provide safeguards for financial institutions, investors and the public, and regulators mandate the process.

Although appraisal value thresholds have changed over time, the obligation to review appraisals has not. Financial institutions must still conduct a review whenever an appraisal supports a transaction.

The Interagency Appraisal and Evaluation Guidelines from 2010 specifically states, “As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance and its own internal policies. This review also should ensure that an appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction.”

Appraisal Disciplinary Actions chart
Disciplinary cases show that nearly all appraisal deficiencies could have been remediated or prevented through proper reviews. Data: Ohio Appraiser Disciplinary Actions 2020-2025

What are real estate appraisal reviews?

A real estate appraisal review evaluates an appraisal report for completeness, accuracy, consistency and compliance with applicable standards.

Qualified professionals who are independent from the subject transaction and have experience in the relevant property type should perform appraisal reviews to maximize the benefits. Use consistent review checklists with a clear understanding of the client’s scope of work. Align with client-specific requirements and regulatory compliance. Provide a detailed narrative of the transaction appraisal that documents findings and highlights deficiencies or recommendations.

Key benefits of real estate appraisal reviews

  • Enhances accuracy and reliability: Errors, omissions, or flawed assumptions in an appraisal can result in inaccurate valuations. A review identifies discrepancies and unsupported conclusions to ensure the final report is accurate and defensible.
  • Mitigates financial risk: For lenders and investors, misvalued properties carry significant risks. Reviews serve as a risk.
  • Ensures regulatory and standards compliance: Financial institutions are subject to strict regulatory requirements, including the Uniform Standards of Professional Appraisal Practice (USPAP), the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Appraisal reviews help ensure compliance with these requirements, protecting the institution from legal or regulatory penalties.
  • Improves consistency across valuations: For organizations managing multiple appraisals, reviews promote consistency in methodology, terminology and value conclusions. This supports transparency and establishes quality standards.
  • Cost limitations: Financial institutions with qualified in-house reviewers can use them as a resource to reduce risk. However, third-party providers can provide review services, with costs passed on to the customer as a line item on the closing settlement sheet.

Regulatory compliance explained

Uniform Standards of Professional Appraisal Practice (USPAP)

The purpose of USPAP is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. It sets forth standards for all types of appraisal services, including real property, personal property, business, appraisal review and mass appraisal. It is essential that appraisers develop and communicate their analyses, opinions and conclusions to intended users in a manner that is meaningful and not misleading. (source: www.appraisalfoundation.org and www.appraisers.org)

The Dodd-Frank Wall Street Reform and Consumer Protection Act

Commonly known as Dodd-Frank, it is legislation that was passed by the U.S. Congress in response to financial industry behavior that led to the financial crisis of 2007–2008. It sought to make the U.S. financial system safer for consumers and taxpayers. It established a number of new government agencies tasked with overseeing the various components of the law and, by extension, various aspects of the financial system. The Dodd Frank Act aimed to protect the independence of appraisers, reasonable and customary appraisal fees, appraiser certification and education standards, requirements for Appraisal Management Companies (AMC’s), standards for Automated Valuation Models (AVMs) and Broker Price Opinions (BPOs), additional provisions for high-risk mortgages, among other issues. (source: www.investopedia.com by Adam Hayes updated February 01,2025 and Regulatory Issues Facing the Real Estate Appraisal Profession)

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)

FIRREA has reshaped lending practices, particularly in real estate and mortgage financing. Lenders must adopt rigorous underwriting standards to ensure loans are extended to creditworthy borrowers, reducing the risk of defaults and enhancing financial system stability. Certified appraisals are now required to ensure accurate property valuations, critical for mitigating systemic risk in mortgage-backed securities. (source: www.accountinginsights.org Published Feb 13, 2025 and Regulatory Issues Facing the Real Estate Appraisal Profession)

Financial institutions face heightened risk if appraisals are not thoroughly reviewed. Independent reviews reduce risk, ensure adherence to standards and save valuable staff time. At Young & Associates, we provide independent appraisal reviews that give your team confidence in lending decisions while reducing compliance burdens. Let Young & Associates help you navigate appraisal compliance with confidence and efficiency. Reach out for a consultation.

Intel’s Ohio investment creates opportunity for economic growth and lending

Written by admin on . Posted in Blog, Lending & Loan Review.

Digital render of Intel's new facility
Digital render of Intel’s new facility located in Central Ohio. Photo courtesy of Intel

By Alex Heavner; Credit Analyst, Young & Associates

Intel is transforming nearly 1,000 acres in New Albany, Ohio, with a $28 billion investment in two advanced chip factories. The site will produce some of the industry’s most advanced semiconductor processors. Ground broke on the project in 2022, with completion anticipated by 2027.

The benefits of a tech giant like Intel establishing a presence in Central Ohio are vast. The direct economic impact begins with the creation of more than 7,000 construction jobs. Once operational, Intel expects to employ at least 3,000 individuals on-site or remotely. Beyond these, more than 10,000 directly impacted workers in the surrounding communities will experience significant growth in the years to come.

Intel intends to onboard more than 350 Ohio-based companies into its supply chain. Small businesses, franchises and startups are expected to flock to the area to capitalize on the expanding ecosystem. Intel’s investment may create tens of thousands of new jobs in industries beyond its own.

Intel has also committed $100 million to support educational initiatives in Ohio, aimed at developing a skilled talent pipeline and strengthening local research institutions. As of May 2025, $17.7 million of that commitment has been allocated. This funding has awarded more than 2,300 scholarships and helped educate over 9,000 students through partnerships with more than 80 colleges and universities. In addition, Intel is rolling out Khanmigo, an AI-powered tutor and teaching assistant, to select middle and high schools.

How Intel helps construct opportunity

According to comprehensive economic models, Intel’s presence is expected to increase Ohio’s GDP by $2.3 billion annually. A significant portion of this growth will stem from the rise in local business development — creating a surge in demand for commercial construction and property development financing.

New Albany is uniquely positioned for this expansion. It is the only Columbus suburb where commercial land use outpaces residential, with 43 percent allocated to business and 31 percent to housing. The city actively seeks to reduce the residential tax burden by increasing commercial revenue, which currently comprises more than 80 percent of the city’s general fund — largely derived from income taxes collected in the business park. This commercial focus directly contributes to enhanced infrastructure, services and quality of life for residents.

Lending: The backbone of community growth

None of this economic potential is realized without one critical component: access to capital. Lending is the engine that turns opportunity into action.

Contractors, electricians, HVAC technicians and landscapers will need financing to purchase or lease vehicles and equipment essential for their trades. Many will also rely on financing for payroll and up-front material costs during lengthy projects.

Restaurants, retailers and healthcare providers require funding to secure land, finance construction, purchase equipment and obtain the necessary licenses to open and operate. In short, every facet of the economy will be touched by lending.

Construction lending, however, carries unique risks. Delays caused by weather, labor shortages or supply chain disruptions are common. Rain could halt progress for a week and time lost is money lost. These interruptions can jeopardize loan repayment and force lenders to make difficult decisions — continue funding, renegotiate terms or sell the loan to mitigate losses.

Additionally, fluctuating material costs and unforeseen expenses can lead to budget overruns. Mismanagement could prevent borrowers from repaying loans, increasing the risk of default. While the unfinished structure typically serves as collateral, its incomplete status may significantly reduce its resale value, leaving lenders exposed.

To manage these risks, financial institutions employ construction inspectors who monitor progress and confirm that funds are being used appropriately. Construction loans are structured with draw schedules — funds are released only after specific milestones are verified. Borrowers often self-fund the initial project phase or may apply for a mobilization draw, a smaller, closely monitored loan intended to cover startup expenses.

Fueling small business growth

Not all small businesses will qualify for traditional loans. That’s where Small Business Administration (SBA) programs come into play.

SBA 7(a) loans provide up to 85 percent loan guarantees, significantly reducing the lender’s risk and encouraging lending to small and growing businesses. These guarantees are not a safety net for default. Borrowers are still held accountable and collateral is pursued before the SBA covers any shortfall.

SBA 504 loans offer another avenue, providing long-term, fixed-rate financing for purchasing real estate, buildings and large equipment. These options are crucial for entrepreneurs looking to seize the opportunities Intel’s investment is creating.

Intel’s investment prepares Central Ohio for progress

Financial institutions are proactively expanding their operations in Central Ohio to meet the demands of this unprecedented economic growth. Many are opening regional hubs, hiring local talent and leveraging advanced technologies to streamline services and improve responsiveness.

For instance, Wells Fargo has established a new technology center in the Easton area of Columbus, expected to generate up to 500 jobs with average annual salaries of $125,000. Regional and community banks are also taking strategic steps, such as partnering with colleges and universities to strengthen talent pipelines and improve workforce readiness.

Institutions are embracing fintech and artificial intelligence (AI) to enhance efficiency, accuracy and scalability. AI tools now support underwriting decisions, smart contract development through blockchain improvements and embedded finance integration — all essential for staying competitive in a fast-evolving market.

Intel creates strategic positioning for financial institutions

To fully capitalize on the economic momentum generated by Intel’s investment, financial institutions must act strategically, proactively positioning themselves to serve both the direct and peripheral financial needs arising in the region. This includes preparing for a substantial increase in commercial lending activity, establishing competitive advantages and reinforcing operational infrastructure.

  1. Expand commercial lending capabilities: Assess commercial lending teams and workflows. Strengthen underwriting capacity and approval efficiency to handle increased loan volume.
  2. Build industry expertise: Develop knowledge of construction, SBA and commercial real estate lending. Partner with experts like Young & Associates for guidance and training.
  3. Strengthen risk management and compliance: Update credit policies, perform stress testing and enhance compliance programs. Ensure regulatory readiness in areas like CRA, fair lending and BSA/AML.
  4. Invest in scalable technology: Modernize systems to improve loan origination, analytics and customer experience. Utilize AI and data tools to increase capacity without sacrificing quality.
  5. Forge local and regional partnerships: Build relationships with developers, contractors and municipalities for early insight and lending opportunities.
  6. Prepare for talent demands: Plan for increased hiring needs. Launch internship programs and partnerships with universities to attract future talent.

Opportunity meets expertise

At Young & Associates and Y&A Credit Services, we support financial institutions navigating increased demands brought on by the Intel development and broader regional growth. Our decades of experience allow us to provide highly specialized consulting in areas such as underwriting, risk management, regulatory compliance and operational scalability.

Our consultants are well-versed in both national regulations and Ohio’s unique financial environment. We remain committed to helping community financial institutions capitalize on opportunity while remaining compliant, competitive and resilient.

What financial institutions need to know about the rise of digital lending

Written by admin on . Posted in Blog, Lending & Loan Review.

By Justin Schray; Credit Analyst, Young & Associates

Visiting a local bank or credit union isn’t always practical anymore. Mobile and digital lending platforms are reshaping financial services, giving consumers faster, more convenient and accessible options. Fintech leaders like SoFi, PayPal and Kabbage are driving this shift, using technology to meet borrowers’ changing needs.

One of the most significant advantages of mobile and digital lending is convenience. These platforms allow users to apply for loans, transfer funds and communicate with customer service representatives — all from the comfort of their home or while on the go. The digital loan application process is typically much faster than traditional methods, often delivering approvals within minutes. Furthermore, all necessary documentation is stored securely online, reducing the need for physical paperwork and enabling borrowers to access their information at any time.

Digital lending platforms also offer a wider range of services and investment opportunities. For example, many now provide “buy now, pay later” options, which are particularly popular among consumers making discretionary purchases, such as during vacations or seasonal shopping. Platforms like Kiva focus on providing microloans to entrepreneurs and small businesses, supporting underserved markets and fostering economic growth. This diversity in offerings ensures that digital lending can cater to a variety of financial needs and consumer preferences.

How financial institutions can compete and adapt to digital lending

To remain competitive in this evolving landscape, traditional financial institutions must invest in digital transformation initiatives that align with both consumer expectations and regulatory frameworks. While fintech’s have led the charge in agility and innovation, banks and credit unions can leverage their established reputations, trust and infrastructure to deliver equally compelling digital lending experiences.

Key steps institutions should take include:

  • Invest in digital infrastructure: Banks must adopt modern loan origination systems (LOS), mobile banking platforms and secure cloud-based storage to replicate the speed and accessibility offered by fintechs.
  • Partner with fintech providers: Collaborations with third-party technology vendors can accelerate the rollout of digital lending capabilities. Many vendors offer white-label or integrated solutions that align with the institution’s branding and compliance requirements.
  • Enhance user experience: Developing intuitive user interfaces and streamlined applications is essential. Borrowers expect minimal friction, clear disclosures and mobile responsiveness throughout the lending process.
  • Implement robust data analytics: Leveraging data to enhance underwriting, detect fraud and personalize lending solutions gives traditional institutions a competitive edge. Automation tools and AI-based decision-making can further improve efficiency.
  • Staff training and change management: Internal teams should be trained not only on new systems but also on the institution’s digital strategy and compliance responsibilities. Change management efforts are critical to ensuring organization-wide adoption.

Maintaining regulatory compliance with digital lending

Rolling out digital lending solutions requires strict adherence to consumer protection regulations, data privacy laws and industry best practices.

Institutions must:

  • Comply with lending regulations: Ensure all Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA) and Fair Credit Reporting Act (FCRA) disclosures are digitally available and easily understood by consumers.
  • Protect customer data: Maintain robust cybersecurity and encryption protocols to safeguard personally identifiable information (PII) in compliance with the Gramm-Leach-Bliley Act (GLBA) and other relevant laws.
  • Establish vendor due diligence programs: When working with third-party vendors, institutions must perform proper risk assessments, monitor ongoing performance and establish clear service-level agreements.
  • Maintain audit trails and documentation: Regulators expect comprehensive documentation of loan decisions, disclosures and communications. Digital systems should be configured to automatically store and organize these records.

By investing in the right technologies, developing a thoughtful rollout plan and embedding regulatory compliance into each phase, financial institutions can successfully transition into the digital lending space and offer competitive alternatives to fintech challengers.

Managing customer complaints is important to an effective CMS

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, News.

By William J. Showalter, CRCM, Senior Consultant, Young & Associates

Financial institution supervisory agencies view a formal process for managing complaints from bank customers as an important element in an effective compliance management system (CMS). The second 2024 issue of the Consumer Compliance Outlook from the Federal Reserve Board (FRB) includes three articles on this.

The FRB is quoted in one of these articles in an unequivocal statement on this issue:

“Consumer complaints are a critical component of the risk-focused supervisory program. The Federal Reserve uses data on consumer complaint activity in its supervisory processes when monitoring financial institution, scoping and conducting examinations, and analyzing applications.”

The other federal agencies agree with this viewpoint. So, banks and thrifts have found that, if they do not handle customer complaints in a formal, consistent manner, their CMS will be viewed with a more critical eye.

Benefits of managing customer complaints

One positive aspect of proactively managing the customer complaint process is there is no real downside. The only “downside” is that such a process shines a light on the extent of complaints, and their underlying causes. But, this disadvantage is actually an advantage. What you don’t know really can hurt you.

The positive results from complaint management can include:

  • Uncovering and dealing with shortcomings in product features, bank processes, customer service and more early before they present real threats
  • Improving customer satisfaction with the bank, and enhancing the bank’s efforts to serve the banking needs of its community
  • Resolving fair treatment issues at an early stage
  • Realigning bank products, processes, and services with regulatory requirements and expectations
  • Heading off potential UDAAP (unfair, deceptive, or abusive acts and practices) issues
  • Reducing the institution’s reputation risk.

Managing customer complaints

The bank already has formal processes, with assigned responsibilities, for handling errors/disputes asserted by customers related to electronic banking (Regulation E, EFTA), open-end credit (Regulation Z, TILA) and mortgage loan servicing (HUD Regulation X, RESPA). Appropriate treatment of complaints in these areas are mandated by the respective regulations.

A formal process to address customer complaints in other areas is considered an industry best practice. It is also a necessary component of an effective CMS by regulators. The structure of this program will vary depending on the culture of the bank and other internal factors.

There are some common elements that form the basis of any sound customer complaint program, including:

  • Define what is considered as a “complaint.” This is considered as crucial to success in this area, so defining “complaint” broadly is seen as a sound practice.
  • Make sure everyone knows how important it is to respond promptly and accurately to any customer complaints. This is a basis for giving good customer service.
  • Appoint a central point (an individual or an office) to be in charge of your complaint response program, especially those referred by the regulators. Also, make sure that all bank staff is aware of how to handle complaints, including where to refer them. Branch managers can be charged with handling customer service issues occurring at their branches that do not involve regulatory issues (fair lending, EFTA, etc.). However, they should report on these complaints and resolutions to the central complaint point to track any trends that arise.
  • Establish uniform standards and timeframes for investigating customer complaints. The time limits you set should be reasonable and probably not significantly longer than those set by regulations for some error resolutions (EFTA, TILA).
  • Ensure that the process includes determining the root cause of complaints being investigated.
  • Document your investigation (e.g., copies of relevant documents and reports) of each customer complaint and the bank response.
  • Ensure that regulators are informed promptly of the results of investigations of any complaints referred by regulatory agencies.
  • Maintain a database of your customer complaints, either manually or using some spreadsheet or database software. This step allows you to mine the data related to this process for information about problems with your products, customer service, potential fair treatment/lending issues and so forth.

Results

The database discussed in the final bullet above can provide a wealth of information about how customers view your bank, your product mix, your service levels and many other facets of your business. It also provides you with an opportunity to discern trends in their infancy, allowing you to deal with negative issues early or enhance the benefits from positive developments.

A proactive approach to customer complaint management derives many benefits for the bank. These include reducing conflicts with customers, enhancing the bank’s public image, improving bank relations with regulators and creating a competitive advantage for the bank.

The newest supervisor

For the past decade or so, there has been a more active and visible regulatory presence in this area – the Consumer Financial Protection Bureau (CFPB). The CFPB established a complaint database to which consumers can submit complaints about financial service providers, have their complaints forwarded to the providers for response and give the public a window on this process and its outcomes.

The CFPB also periodically analyses the results of this process, usually for one or another particular financial service area – student loans one time, mortgage servicing another, yet another financial service another time. The other agencies, as noted earlier, analyze data related to consumer complaints that are handled through each of them.

The agencies often view data about consumer complaints to be an indicator of a need for future regulations. This view is reinforced by provisions in the Dodd-Frank Act of 2010.

The purpose of the CFPB database is to provide consumers with one central point through which they can submit complaints about financial service providers, without having to search through the maze of regulatory agencies first, and follow the results. Another purpose is to provide a gauge for how well financial service providers are serving their particular customer bases.

While the CFPB database can be a useful tool, financial institutions should have a goal of trying to deal with their own customers’ complaints and concerns themselves, before customers become so frustrated that they feel the need to turn to supervisory agencies.

How Y&A can help

At Young & Associates, we understand the critical role that managing customer complaints plays in building an effective compliance management system. Our full suite of regulatory compliance consulting and advisory services is tailored to the needs of community financial institutions. We help ensure you can navigate complex regulatory requirements with confidence. We can help with compliance outsourcing, our VCC Program, compliance management reviews or risk assessment facilitation. Let us simplify your compliance processes so you can focus on achieving your strategic goals. For more information, please contact us today. 

CRE stress testing for banks: A crucial tool in a post-COVID world

Written by admin on . Posted in Advice, Blog, Consultation, Contingency Planning, CRE & AG Stress Testing, Interest Rate Review, Interest Rate Risk, Lending & Loan Review, Liquidity Management, Liquidity Review, Management & Planning, Regulatory Enforcement, Risk Management.

By Jerry Sutherin, CEO at Young & Associates

Despite having limited requirements as defined by interagency guidance, the case can be made for requiring community financial institutions to have regular stress tests performed on their commercial real estate loan portfolios.

Emerging challenges in commercial real estate lending

Recent post-COVID events have resulted in a heightened concern with regulators as it relates to commercial real estate. Most notably, interest rates have increased 525 bps from March 2022 through July 2023. This correlates with the level of commercial loan delinquencies over that same period as noted in the chart below. This is further exacerbated the “work from home culture” and office vacancies increasing over the same period.

The ultimate impact on the commercial real estate sector is weaker NOIs, coverage ratios that are insufficient to meet loan covenants, higher Cap Rates and lower valuations. For those loans locked into a lower rate, the issue now becomes; what happens when loans mature or reset? That is occurring now.

CRE Composition and Delinquency at US Banks Chart - S&P Global

Regulatory expectations for bank stress testing

Regulatory expectations for community bank stress testing initiatives have been set in both formal regulatory guidance and through more informal publications and statements. An interagency statement was released in May 2012 to provide clarification of supervisory expectations for stress testing by community banks.[1]

The issuance specifically stated that community banks are not required or expected to conduct the types of enterprise stress tests specifically articulated for larger institutions in rules implementing Dodd-Frank stress testing requirements, the agencies’ capital plan for larger institutions, or as described in interagency stress testing guidance for organizations with more than $10 billion in total consolidated assets.

OCC guidance on stress testing practices

However, in October 2012, the OCC provided additional guidance to banks on using stress testing to identify and quantify risk in the loan portfolio and to help establish effective strategic and capital planning processes.[2] The guidance reiterated that complex, enterprise-wide stress testing is not required of community banks. It also states that some stress testing of loan portfolios by community banks is considered to be an important part of sound risk management.

In the guidance, the OCC does not endorse a particular stress testing method for community banks; however, the guidance also discusses common elements that a community bank should consider, including asking plausible “what if” questions about key vulnerabilities; making a reasonable determination of how much impact the stress event or factor might have on earnings and capital; and incorporating the resulting analysis into the bank’s overall risk management process, asset/liability strategies, and strategic and capital planning processes.

The OCC bulletin also provides a simple example of a stress testing framework for community banks. In the summer of 2012, the FDIC also provided further guidance related to community bank stress testing in the Supervisory Insights Summer Edition.[3]

Interagency guidance on commercial real estate risk

Perhaps the most significant piece of guidance related to loan portfolio stress testing for community banks is the 2006 interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.[4] The continuing importance of and regulatory emphasis on this guidance was made clear in December 2015 when the interagency Statement on Prudent Risk Management for Commercial Real Estate Lending[5] was released, which reiterated the importance of the principles described in the 2006 CRE Guidance.

The 2006 CRE Guidance describes several important practices for effectively managing the risks associated with CRE lending, especially concentration risk. Portfolio stress testing of the CRE portfolio is described as a critical risk management tool for institutions with CRE concentrations.

Examiner expectations for portfolio-level stress testing

While community banks have not been pushed to perform the enterprise-wide stress testing that the above guidance specifically states is not expected of them, examiner expectations for portfolio-level loan stress tests have continued to increase over time and are becoming more prevalent during a bank’s recurring exams. These expectations are centered on portfolios that represent significant concentrations and, given the perceived level of risk and the existence of the 2006 CRE Guidance, are therefore most focused on CRE portfolios.

A reasonable and well-documented approach to CRE portfolio stress testing, undertaken at appropriately frequent intervals such as on an annual basis, is the most effective way for community banks to meet examiner expectations and to contribute toward effective risk management of CRE concentrations.

Regulatory criteria for CRE concentration risk

The guidance also states that strong risk management practices (with stress testing being one of the most important) and appropriate levels of capital are important elements of a sound CRE lending program. Particularly when an institution has a concentration in CRE loans. It then lays out the criteria regulatory agencies utilize as a preliminary means of identifying institutions that are potentially exposed to significant CRE concentration risk:

  1. Total reported loans for construction, land development, and other land represent 100% percent or more of total capital, or
  2. Total commercial real estate loans (as described above) represent 300% or more of the institution’s total capital. The outstanding balance has increased by 50% or more during the prior 36 months.

Concentration Levels Chart

The guidance is clear that these thresholds do not constitute limits on an institution’s lending activity and are instead intended to function as a high-level indicator of institutions potentially exposed to CRE concentration risk. Conversely, being below these thresholds also does not constitute a “safe harbor” for institutions if other risk indicators are present such as poor underwriting or poor performance metrics such as deteriorating risk rating migration and delinquency.

Case study: Loan portfolio concentration levels

As noted in the example above, the figures indicate that the bank does not have a high level of construction, and land development loans as the balances do not exceed the 100% threshold level as a percentage of total capital. However, the Bank has exceeded the 300% threshold of non-owner-occupied real estate loans as calculated under the 2006 CRE Guidance.  Additionally, the Bank’s three-year growth rate in this category was 72.7%, which is greater than the 50% reference level that constitutes the second part of the two-part regulatory test for a heightened concentration in this category.

Impact of loan acquisitions

It should also be noted that regulatory guidance does not differentiate between organic growth and commercial real estate growth via acquisition. Therefore, all such loans acquired does impact the ratios noted in the concentration chart above.

Loss estimation in bank stress testing

The basic premise for any stress test modeling is to identify moderate / high loss estimates. Then look at the impact to capital on a loan-level basis as well as portfolio-wide. While some community banks provide some stress testing on a transactional basis at origination, the output is typically limited to scenarios that focus primarily on future interest rate fluctuations.

CRE stress test modeling, on the other hand, allows for an organization to gauge potential losses of the CRE portfolio using internal core loan-level data as well as call report data while factoring in other variables that could influence the ultimate collectability of commercial real estate loans.

Loan-level or bottom-up stress testing

The bottom-up or loan-level portion of the stress test estimates losses under the stress scenarios on a loan-by-loan basis. The loan selection is typically a function of the desired penetration identified by the organization. It’s comprised mostly of larger transactions with a sampling of newer originations and adversely risk rated transactions.

In this portion of the analysis, various stress factors are applied to the NOI, collateral value, and interest rate for each loan identified by the Bank. This information, coupled with the transaction’s debt service coverage, liquidation costs and Cap Rates help form a possible loan-level loss for each loan in moderate and in moderate and high-risk scenarios.

Top-down stress testing

To ensure that the entire CRE portfolio is stressed, a useful model would use a top-down loss estimation method to “fill in” losses on the remaining portfolio for which loan-level information was not provided. This is accomplished by comparing the total balances for which loan-level data was provided in each of the various categories (construction and land development, multifamily, and all other non-owner occupied CRE) to the Bank’s call report. Losses are estimated on the amount of exposure for which loan-level information was not provided by applying a top-down loss rate.

The Moderate and High Stress Scenarios below are determined by applying the loss rates included in the stress test example in the 2012 OCC guidance on community bank stress testing. These loss rates represent two-year loss rates, consistent with the OCC’s stress testing guidance.

Top-Down Loss Rates Chart

Enhancing portfolio oversight and credit risk management

Collectively, the “bottom-up (loan level)” and “top-down” moderate and high stress scenarios provide a global overview of a bank’s CRE portfolio and its potential impact to capital. Knowing that this is not a replacement for an enterprise-wide stress test. However, it allows a bank to provide its management, board of directors and regulators with some context of the estimated losses in this segment of their loan portfolio. It also serves as an effective supplement to their internal or third-party loan review.

Historically speaking, any situation in which significant weakness is experienced in critical market and economic factors will result in credit losses that are elevated above those that a bank experiences in “normal” times if unprepared. There is no replacement for appropriate credit administration, however all banks should always utilize tools such as stress testing to enhance their oversight of the metrics behind their CRE portfolio.

Financial institution performance and ultimately their ongoing safety and soundness are dependent on the performance of the Bank’s CRE portfolio. It is critical that management and the board of directors ensure that the bank emphasizes effective implementation of the risk management elements discussed in the 2006 CRE Guidance. These elements include:

  • Continued effective board and management oversight,
  • Effective portfolio management,
  • Ensuring that management information systems are able to provide the information necessary for effective risk management,
  • Performing periodic market analysis and stress testing,
  • Regularly evaluating the appropriateness of credit underwriting standards, and
  • Maintaining an effective credit risk review function

If a financial institution is successful in these endeavors, their CRE loan portfolio should continue to contribute positively to their performance. Accordingly, I am a proponent of all community financial institutions having a stress test performed regularly. This helps to ensure the performance of that segment of their loan portfolio as well as the entire organization.

Partner with Young & Associates for expert CRE stress testing

Navigating the complexities of commercial real estate stress testing can be challenging, especially with evolving regulatory expectations and economic uncertainties. At Young & Associates, we offer specialized CRE and Ag portfolio stress testing services designed to address these very challenges. With over 45 years of experience, our team understands the intricacies of regulatory guidance. We can provide your community bank with the insights needed to enhance strategic and capital planning.

Our proven stress testing model assesses the potential impacts of adverse economic conditions. This helps you manage risk effectively and comply with regulatory expectations. We provide actionable insights to guide your loan product design and underwriting standards. This eases the burden of stress testing and supporting your institution’s resilience.

Choose Young & Associates for a partnership that combines deep industry knowledge with a commitment to excellence. Let us help you stay ahead of regulatory demands and strengthen your CRE portfolio management. Reach out to us now to schedule a consultation.

 

[1]              FDIC, PR 54-2012, “Statement to Clarify Supervisory Expectations for Stress Testing by Community Banks.” May 14, 2012.

[2]              OCC Bulletin 2012-33, “Community Bank Stress Testing: Supervisory Guidance.” October 18, 2012.

[3]              FDIC “Supervisory Insights, 9(1).” Summer 2012.

[4]              FDIC FIL-104-2006, OCC Bulletin 2006-46, FRB SR 07-1, “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.“ December 12, 2006.

[5]              FDIC FIL-62-2015, OCC Bulletin 2015-51, FRB SR 15-17, “Statement on Prudent Risk Management for Commercial Real Estate Lending.“ December 18, 2015.

 

Spotlight on Compliance Training: Showalter Featured in In Touch Magazine

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation, News.

Young & Associates’ Expert Shares Insights on Compliance Training

William Showalter, CRCM, CRP, a Senior Consultant with Young & Associates, was recently featured in an issue of In Touch Magazine, the publication of the Community Bankers Association of Kansas. The article, “Training: The Foundation of Effective Compliance,” underscores the critical role that comprehensive training plays in building and maintaining a robust compliance program within financial institutions.

Training: The Bedrock of Compliance

In his article, Showalter highlights a timeless truth: employees can’t be expected to comply with laws and regulations if they haven’t been properly instructed on them. Training is the bedrock upon which a thriving compliance program is built, enabling institutions to manage compliance risks effectively. With over 20 years of experience transitioning into a new compliance management model, Showalter emphasizes pushing responsibility and involvement down to the front lines, making well-versed employees essential for success.

Why Train? Reducing Risk and Ensuring Compliance

Training employees in compliance is not just about meeting regulatory requirements; it’s about reducing the risk of noncompliance. Showalter points out that educating the bank’s board of directors, management, and staff is essential for maintaining an effective compliance program. Compliance training helps mitigate various risks identified by federal banking supervisors, including compliance risk, transaction or operational risk, and reputation risk.

Customizing Training Programs for Success

Effective compliance training varies from one institution to another. Showalter offers practical guidance on setting up a successful compliance training program, stressing the importance of a thorough needs assessment. Identifying the types of products and services offered, the regulations impacting these processes, and the current knowledge level of staff are crucial steps in this process. The article also provides insights into choosing the right format and media for training, from online programs to classroom-style sessions, ensuring that the training is relevant and engaging for all employees.

Keeping Compliance on Track: Testing and Record-Keeping

An essential component of any training process is testing to measure success and maintain records. Showalter emphasizes the need for continuous assessment and refresher training to keep up with evolving regulations and ensure that all employees remain knowledgeable and compliant.

William Showalter’s expertise and practical advice in this article underscore the importance of a proactive approach to compliance training, helping financial institutions navigate the complex regulatory landscape with confidence. For more insights and to read the full article, click here. Stay informed with the Community Bankers Association of Kansas and discover more industry insights in In Touch Magazine — the leading publication dedicated exclusively to serving the interests of Kansas community banks.

Regulatory Compliance Training for Financial Institutions

Investing in the training and development of your staff is the most important investment your financial institution can make. Competent, well-trained employees not only ensure compliance but also contribute to the overall success and profitability of your institution.

Young & Associates is a national leader in continuing education and training for financial professionals. Our consultants bring unmatched real-world expertise in topics such as lending, underwriting, regulatory compliance, and director development. We offer a wide range of education and training services for financial professionals. Our training is flexible, with options for off-site, in-house, and virtual sessions, all customized to meet the specific needs and objectives of your institution.

Take a proactive approach to regulatory compliance with our comprehensive training for your personnel. Whether you need to establish a compliance program or update your knowledge on changing regulations, our training provides the latest information and techniques for maintaining an effective internal program. Topics include the Bank Secrecy Act, Privacy, Fair Lending, and more, all customized to the specific needs of your institution. Investing in our training services helps ensure compliance and boosts your institution’s overall success.

We also offer the Community Bankers for Compliance Program (CBC), the longest-running compliance program in the country. This program equips banks with comprehensive tools for managing in-house compliance, including live seminars, webinars, a compliance hotline, a members-only portal, and a monthly newsletter.

Discover our full range of compliance training services and explore our comprehensive regulatory compliance consulting offerings.

Contact us today to see how we can support your bank or credit union in achieving your strategic goals.

Implementing Compliance: Key Principles & Practices

Written by admin on . Posted in Advice, Blog, Compliance & Regulations, Consultation.

By: Bill Elliott, CRCM, Director of Compliance Education at Young & Associates

There is no question that laws and regulations materially change the way banks do business. The recent new laws and regulations have, more than ever before, crossed over the consumer protection regulatory line and into bank management. This complicates your life, and the starts and stops do not make it easier. 

Consider the “1071 Rule,” which amounted to HMDA for commercial loans, with even more invasive questions. The underlying law was passed in 2010 (the Dodd-Frank Act), and the CFPB took almost 13 years to implement it, only to be stopped by the courts for stepping way beyond the requirements of the law. The updated CRA regulation is also now being challenged in the courts. 

Compliance does not happen in a vacuum. Many of the regulations cover multiple disciplines within the bank, and many departments have to be involved in implementing the solution. This article discusses some of the basics of implementing compliance within your organization, as well as an approach that we believe is critical to the success of any bank. 

The Key Ingredients

To establish a successful compliance program, the following ingredients must exist:  

  • Board of Directors support 
  • Management support 
  • Staff development 
  • A viable and structured compliance network (compliance council) 
  • Compliance monitoring  

Board of Directors Support

The board is ultimately responsible for the success or failure of the compliance program, just as they are for any other aspect of the bank’s risk management. The board needs a flow of information to assist them in understanding the compliance function and the current status of the program. The board must also understand the stresses for compliance and ensure that there are adequate resources to facilitate success. 

Management Support

Management must be actively involved in the development of the compliance program. Although management may not design and develop the program, they should provide direction and ensure that there are resources to support its establishment and maintenance. Management must stay involved by monitoring the progress of the program through requiring periodic reports. 

Staff Development

Staff development involves providing staff with the necessary background to understand the purpose of compliance, the structure to support the program, and the technical skills to it out effectively. Management must direct the designated person or council and allow them the resources, including the resource of time, to fully implement the compliance program. 

A Practical Solution: The Compliance Council

In order to address the compliance burden, we believe banks should use a compliance council. This is NOT a committee. It is a reporting mechanism, where each area of the bank is responsible for the compliance duties that impact their jobs. At the council, they report progress or lack thereof in meeting those requirements.  

The results of the compliance council meeting are reduced to writing. Those minutes then go to management and the board so that they understand the current compliance situation in which the bank finds itself. A compliance council aids the institution in the following ways: 

  • The compliance council is comprised of representatives from each major area of the institution, thereby building continuity into the program. 
  • The compliance council builds compliance into the daily operational procedures of each area so that the institution can function from a practical and preventive focus. 
  • The compliance council incorporates comprehensive compliance coverage through its composition, i.e., lending, customer service, and operations. 
  • The compliance council establishes a compliance link to planning for new products and services. Each area of the institution can establish the compliance details during the planning and implementation stages. 
  • The compliance council allows the institution to include monitoring procedures in the daily workflow that integrates compliance without creating unnecessary work burdens i.e., the use of checklists and most common concern policies. 
  • The compliance council enables the institution to create an effective training and communications channel for all compliance issues. The council members will be able to take information back to their respective areas. 

Choosing the Compliance Council

The compliance council’s objective is to spread the duties among a small group of individuals to reduce the burden on anyone and increase coverage of the compliance function. Compliance has expanded far beyond just “letting the compliance officer deal with it.” 

The persons who are chosen might be representatives from: 

  • real estate lending, 
  • consumer lending, 
  • customer service, 
  • deposit operations, and 
  • compliance administration. 

Of course, banks are free to add others, such as BSA, branch administration, etc. 

The use of management in an advisory capacity can help to ensure accountability. It is difficult to say “I did not have time” or something similar in front of a senior manager. But hopefully, this is not necessary in most banks. The “minutes” of the meeting become a useful tool for management and the board to understand the current compliance position of the bank. 

If there is a regulatory change that involves multiple disciplines, then and only then does the “council” become a “committee” to address the common issue. 

Authority and Credibility

It is important for the compliance officer and the compliance council to develop sufficient authority to operate within the bank. Without this authority, the officer and the council will be ineffective.  

Assuming that the board of directors and executive management have clearly granted the compliance officer and the compliance council sufficient authority with which to operate, the compliance officer and the compliance council must ensure their own credibility to retain any authority that the board of directors and management have granted them. 

The compliance council’s biggest barrier involves establishing credibility with the bank’s employees. For example, if in the eyes of the employees, the compliance council is an informational source to help them do their job, the council will succeed. If communication channels are established but never work, the council will fail. The key to the success of the compliance council is to establish, implement, monitor, and enforce the compliance function throughout the bank. 

Effective Compliance Implementation

Navigating the dynamic landscape of banking regulations requires proactive strategies and a collaborative approach across all levels of an institution. As the regulatory environment continues to evolve, compliance becomes increasingly complex, necessitating a robust framework, dedicated oversight, and effective implementation to ensure adherence. 

Empowering Banks for Regulatory Compliance Success

At Young & Associates, we understand the challenges banks face in implementing and maintaining effective compliance programs. Our team of experts is committed to providing tailored solutions that empower banks to navigate regulatory requirements with confidence and efficiency. 

Ready to streamline your compliance efforts and fortify your institution against compliance risk? Partner with Y&A for comprehensive regulatory compliance consulting services. Contact us today to learn more about how we can support your bank in alleviating regulatory burdens. 

HMDA and CRA Adjustments Are Here

Written by admin on . Posted in Advice, Compliance & Regulations, Consultation, HMDA.

By: William J. Showalter, CRCM, CRP

There are changes that arrived with the new year of 2024 to Home Mortgage Disclosure Act (HMDA) compliance for banks and thrifts in many areas. No, the Consumer Financial Protection Bureau (CFPB) is not repealing Regulation C or adding more detail to the required data we collect and report. The existing rule is still in place. 

The changes we will look at here are driven by the decennial (every 10 years) adjustments by the Office of Management and Budget (OMB) to geographic units used by the federal government, including the Census Bureau, for statistical purposes. The particular geographic units that impact bank and thrift HMDA compliance are Metropolitan Statistical Areas (MSAs) since they are a qualifying location factor for lenders in determining HMDA coverage. 

The OMB’s changes will also have possible effects on bank and thrift compliance with the Community Reinvestment Act (CRA) in the drawing of institutional CRA “assessment areas.” 

These latest changes were effective when issued by OMB – July 21, 2023 – so they can impact 2024 HMDA coverage. 

OMB Action 

The OMB completed a process of delineating Core Based Statistical Areas (CBSAs) based on 2020 Census data and the American Community Survey and Census Population Estimates Program for 2020 and 2021. A CBSA is a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties. The standards designate and delineate two categories of CBSAs: Metropolitan Statistical Areas and Micropolitan Statistical Areas.  

The general concept of a metropolitan statistical area is that of an area containing a large population nucleus and adjacent communities that have a high degree of integration with that nucleus. The concept of a micropolitan statistical area closely parallels that of the metropolitan statistical area, but a micropolitan statistical area features a smaller nucleus. The purpose of these statistical areas is unchanged from when metropolitan areas were first delineated: The classification provides a nationally consistent set of delineations for collecting, tabulating, and publishing federal statistics for geographic areas. 

The new delineations are found in OMB Bulletin 23-01 at https://www.whitehouse.gov/wp-content/uploads/2023/07/OMB-Bulletin-23-01.pdf.  

HMDA Coverage 

Regulation C covers any “financial institution,” as defined by the regulation and its underlying HMDA statute. “Financial institution” means, in part, a bank, savings association, or credit union that: 

  • On the preceding December 31, had assets in excess of the asset threshold established and published annually by the CFPB for coverage by HMDA, based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, rounded to the nearest million – $56 million for 2024 HMDA coverage 
  • On the preceding December 31, had a home or branch office in a Metropolitan Statistical Area (MSA) [Micropolitan Statistical Areas have no HMDA impact.] 
  • In the preceding calendar year, originated at least one home purchase loan (excluding temporary financing such as a construction loan) or refinancing of a home purchase loan, secured by a first lien on a one-to four-family dwelling, and 
  • Meets one or more of the following two criteria: is federally insured or regulated; or the mortgage loan referred to in the previous bullet was insured, guaranteed, or supplemented by a federal agency or was intended for sale to Fannie Mae or Freddie Mac
  • Meets at least one of the following criteria in each of the two preceding calendar years: originated at least 25 closed-end mortgage loans that are not excluded by §1003.3(c)(1) through (10) or (c)(13), or originated at least 200 open-end lines of credit that are not excluded by the cited section of Regulation C 

There are also similar qualification criteria for for-profit mortgage lenders that are not banks, thrifts, or credit unions, which we will not detail here. 

The qualification criterion impacted by OMB’s action is the geographic one, the second bullet above. If a financial institution that otherwise meets HMDA coverage criteria has an office in an MSA on December 31, then it is covered by HMDA for the following year. For many lenders, determining HMDA coverage is a one-time exercise (other than those who are right around the asset-size threshold). 

Ohio MSA Changes 

I will use my native Ohio as an example of what the MSA changes mean to banks and thrifts and their compliance with HMDA requirements. 

Three counties in Ohio were shuffled into Metropolitan Statistical Areas in this latest OMB action – one being added to an existing MSA and two comprising a new MSA. No Ohio counties were removed this time from MSAs in which they were formerly included. 

Ashtabula County has been added to the Cleveland MSA. Erie and Ottawa counties have been included in the new Sandusky MSA. 

There were also some changes in non-Ohio parts of MSAs that include other Ohio counties. Lenders in the Cincinnati, Huntington-Ashland, and Youngstown-Warren MSAs should look for these additions and deletions of neighboring states’ counties. 

All the details of the new Ohio geographic delineations can be found in the OMB Bulletin mentioned above. The list of MSAs and micropolitan statistical areas by state is in List 6 (with Ohio on pages 168-169) of the OMB Bulletin, while five additional lists in the bulletin give other breakdowns of the geographic delineations, including the counties included in each. 

HMDA Impact 

In 2023, there was no impact for HMDA reporting because the new MSA delineations were not in effect on December 31, 2022. 

However, they were in effect December 31, 2023, which has the following impacts: 

  • Banks and thrifts with offices in Ashtabula, Erie, and Ottawa counties, and in no other MSA counties, now have to begin collecting HMDA data January 1, 2024, and make their first reports of that data by March 1, 2025.
  • Unlike 10 years ago, there are no banks and thrifts whose offices in Ohio counties have made them subject to HMDA reporting (i.e., no offices in other MSA counties) that will no longer have to collect HMDA data beginning in 2024. (Note that such banks would still be obligated to report their 2023 HMDA data by March 1, 2024.) 

If your institution has an office in any of the counties affected by the MSA changes, be sure to review how this action affects your HMDA compliance beginning in 2024. 

CRA Impact 

MSAs affect the CRA compliance efforts of banks and thrifts, too. They come into play in drawing up an institution’s CRA assessment area (AA), as well as in the small business and small farm lending disclosure statements prepared by regulators annually for institutions reporting their data (all except for “small” retail banks and thrifts).  

The CRA rules require that an institution’s CRA AA consist generally of one or more MSAs or metropolitan divisions – using the MSA or metropolitan divisions boundaries that were in effect as of January 1 of the calendar year in which the delineation is made – or one or more contiguous political subdivisions e.g., counties, cities, or towns). 

A CRA AA may not extend substantially beyond an MSA boundary or beyond a state boundary unless the assessment area is located in a multistate MSA. If a bank or thrift serves a geographic area that extends substantially beyond a state boundary, the bank must delineate separate AAs for the areas in each state. If a bank or thrift serves a geographic area that extends substantially beyond an MSA boundary, it must delineate separate AAs for the areas inside and outside the MSA. 

The regulators prepare annually, for each MSA and the nonmetropolitan portion of each state, an aggregate disclosure statement of small business and small farm lending by all institutions subject to reporting of that data (all except “small” retail banks and thrifts). 

Therefore, the redrawn MSA boundaries might have an impact on your institution’s CRA compliance. Each bank and thrift with the affected counties in its CRA AA should review its delineation to make sure that the changes do not require an adjustment to those delineations. If any adjustments are needed, they should be made by April 1 – when any updating of CRA public files must be accomplished (including the map of your CRA AA).  

Links 

This OMB Bulletin provide the six lists of statistical areas that are available electronically at the link stated above or from the OMB website at https://www.whitehouse.gov/omb/information-for-agencies/bulletins/.  This update, historical delineations, and other information about population statistics are available on the Census Bureau’s website at https://www.census.gov/programs-surveys/metro-micro.html.

Young & Associates: Your Trusted Partner in Regulatory Compliance

In navigating the intricacies of HMDA and CRA compliance, Young & Associates stands ready to support community banks and credit unions. Our regulatory compliance consulting services ensure a seamless adherence to evolving regulations. Stay ahead with Young & Associates – your trusted partner in compliance excellence. Contact us today for tailored solutions that empower your financial institution.

Navigating Compliance Challenges: Reg Z, Reg E, and Flood Rules

Written by admin on . Posted in Blog, Compliance & Regulations, Consultation.

Expert Regulatory Compliance Services for Financial Institutions

Are you finding the ever-evolving web of financial regulations a challenge to navigate? In the intricate landscape of compliance, regulations like Z, E, and Flood can be complex and overwhelming for financial institutions. Young & Associates offers a comprehensive suite of solutions specifically tailored to alleviate the burden of regulatory compliance for community banks and credit unions.

Regulatory Challenges Made Simple

Regulation Z Compliance: Comprehensive TILA Support

A cornerstone of financial institution compliance, Regulation Z delineates the implementation and execution of the Truth in Lending Act (TILA). Our experts understand the nuances of Reg Z and can guide your institution through its complex requirements. Our Reg Z compliance solutions are meticulously crafted to not only ensure your institution’s compliance but also to ensure transparency and fairness for your valued customers or members.

  • Loan Disclosures.  We review your financial institution’s disclosures – both open-end and closed-end (including TRID) disclosures – to help ensure compliance with these measures to inform customers, and to help your institution avoid potential required reimbursements, regulatory penalties, and civil liability.
  • Right of Rescission.  We help your lending personnel navigate the intricacies of the right of rescission, making sure that the proper consumers are recognized for this right and given required notices and disclosures, and that disbursements and other lender actions are delayed until it is confirmed that the customers have not exercised their cancellation right.  Proper observance of rescission requirements will help your institution avoid significant penalties – extended rescission rights, regulatory penalties, and civil liability.
  • Other Consumer Protections.  We facilitate your financial institution’s efforts to comply with, or avoid, significant requirements related to high-cost mortgages, home equity lines of credit, higher priced mortgage loans, private education loans, and others.

Regulation E Compliance: EFTs and Error Resolution

The Electronic Fund Transfer Act (EFTA) brings its own set of challenges. The EFTA, implemented by Regulation E, governs electronic transactions. As the volume of EFT transactions continues to rise, so does the complexity of associated error claims. Resolving these claims can pose a significant challenge for banks and credit unions. Our team specializes in providing tailored guidance and support for Reg E compliance, including:

  • Error Resolution Procedures: We review your financial institution’s error resolution procedures, ensuring strict adherence to meet regulatory standards.
  • Electronic Payment Systems: We facilitate adherence to Reg E requirements by ensuring your financial institution’s electronic payment systems and procedures are diligently followed.
  • Consumer Protection: We review your Reg E compliance program to confirm that your institution’s procedures and adherence align with regulations aimed at safeguarding your customers’ rights, privacy, and security.

You can rely on our Reg E compliance guidance to navigate the complexities of regulatory requirements, effectively mitigating the risks of violations and penalties in the dynamic landscape of electronic transactions.

Flood Insurance Compliance: Ensuring Flood Disaster Protection

Navigating the intricacies of federal flood regulations is crucial for financial institutions, given the increased scrutiny by regulators and the potential risks and penalties associated with noncompliance. Monetary penalties for such violations underscore the importance of a robust compliance program. Young & Associates is committed to providing comprehensive compliance solutions to guide your institution through the complex requirements of the Flood Disaster Protection Act encapsulated in the flood insurance rules.

At Y&A, our commitment to comprehensive compliance solutions extends to helping your institution navigate the nuances of federal flood-related requirements. Our seasoned experts specialize in helping your institution navigate federal flood-related requirements, offering tailored solutions to minimize exposure to potential risks. We can review your financial institution’s Flood Act compliance program to ensure compliance with variables such as flood zone determinations, borrower notifications, lender placement, and more.

Key components of our flood compliance reviews dial in on common areas of violations, including:

  • Compliance with Flood Regulations for Lenders: Our experts understand the intricacies of flood regulations, addressing common areas of violations such as proper loan file documentation, justified waivers, insurance coverage requirements, notice to borrower requirements, forced placement of flood insurance requirements, and more. We ensure your institution adheres to the most stringent regulatory standards, mitigating risks associated with non-compliant loans.
  • Flood Insurance Notice to Borrower Requirements: Timely and accurate notices to borrowers are critical. Our comprehensive reviews focus on your institution’s process for delivering and receiving acknowledgement of flood insurance-related notices, ensuring compliance with regulatory timelines and requirements.
  • SFHA Flood Insurance Requirements: Staying abreast of FEMA’s special flood hazard areas and implementing appropriate flood insurance requirements is essential. Our compliance reviews are designed to assist your institution in adhering to evolving SFHA standards.

As your trusted partner, we streamline the compliance process, allowing your institution to focus on core functions while remaining resilient in the face of regulatory challenges. Let us guide you through the intricate web of flood-related regulations, ensuring your institution stays protected from compliance violations in the ever-evolving financial landscape.

Expert Guidance on Regulation Z, Regulation E, and Flood Compliance

Regulations such as Z, E, and Flood are just the tip of the iceberg. Our consultants are well-versed in all aspects of federal banking consumer regulations, ensuring you’re not just compliant but also in the best possible position to thrive in a highly regulated environment. Whether you’re looking for assistance in understanding the intricacies of Truth in Lending, Electronic Fund Transfers, or Flood Compliance Requirements, we have you covered.

Why Partner With Young & Associates?

At Y&A, we’ve been a trusted partner in regulatory compliance for over four decades, and here’s why:

  • Stay Ahead of Regulatory Changes: We keep you informed and prepared in a constantly evolving regulatory landscape. We help you navigate the intricate landscape of financial regulations, so you can focus on your core mission.
  • Comprehensive Solutions Tailored to Your Institution: We understand that a one-size-fits-all approach doesn’t work in regulatory compliance. Our solutions are customized to address your institution’s unique needs.
  • Real Solutions for Real Challenges: We provide practical, real-world recommendations, enabling your bank or credit union to not only meet regulatory requirements but also implement best practices for a robust compliance framework.
  • Experienced Team: Our seasoned consultants bring decades of experience in banking and financial regulation to the table, ensuring you receive expert guidance.
  • Unmatched Quality: With over 45 years exclusively dedicated to financial institutions, excellence is our trademark. We maintain meticulous standards, offering precision, thoroughness, and a steadfast commitment to delivering actionable results.
  • Comprehensive Support: We offer end-to-end support, and our full-service approach covers all aspects of financial institution consulting. When you partner with Y&A, you gain access to a comprehensive team of industry experts.

Let’s Navigate Compliance Together

Don’t let regulatory challenges hinder your institution’s growth. Reach out to Young & Associates today to ensure your institution not only meets compliance standards but is also prepared for success. We’re here to help you navigate the intricate world of Regulations Z, E, H, and beyond. With our expertise, your institution can thrive in a highly regulated environment.

In addition to our full suite of compliance consulting services, we offer:

  • Virtual Compliance Consultant (VCC) Program: Receive access to all the invaluable compliance tools and services that we have to offer including compliance coaching, compliance products and policies, regulatory manuals, access to an online forum with experts from Y&A, and more.
  • Compliance Policies, Tools, and Workbooks: We offer customizable resources designed to simplify complex compliance tasks. From policies to interactive workbooks, our tools facilitate smoother compliance operations.
  • Compliance Update Newsletter: This monthly newsletter provides a thorough compliance review and covers developments that affect the banking industry. Each month our compliance experts scour the regulatory issuances, final rules, and amendments to provide you with the compliance information you need. The newsletter includes hot topics, action items, a compliance calendar, and more relevant information and resources.
  • Education Services: In addition to timely, easily accessible webinars, we offer customizable training solutions.

Contact us to explore how our tailored solutions can address your regulatory challenges.

Managing CRE Credit Risk Amid Market Shifts

Written by admin on . Posted in Advice, Consultation, CRE & AG Stress Testing, Lending & Loan Review, Liquidity Review, Management & Planning, Regulatory Enforcement.

By: Jerry Sutherin, President & CEO of Young & Associates

The landscape of commercial real estate (CRE) lending is shifting due to current economic events, presenting both challenges and opportunities for community financial institutions deeply entrenched in this sector. The challenges range from the profound impact of remote work trends and the uncertain future of office spaces to growing concerns about inflation and higher interest rates bringing CRE risk into the spotlight. This volatility has garnered increased attention from internal and external stakeholders, as well as regulatory authorities. Consequently, identifying the most pressing threats among these challenges and proactively mitigating risk has become a top priority for financial institutions with CRE exposure.

In the face of rising interest rates and delinquencies, many financial institutions are preparing to confront these economic stressors. In fact, some were already scaling back lending before the recent collapses of Silicon Valley Bank and Signature Bank. We have all witnessed the tightening of lending standards resulting from that event, and many analysts anticipate further tightening among all community financial institutions. This constriction is also impacted by limited deposits and liquidity forcing financial institutions to be selective in how they deploy their capital. These facts leave many analysts predicting when credit problems will emerge in the CRE sector.

The evidence speaks for itself. According to S&P Global Market Intelligence, the delinquency rate for all CRE loans held in U.S. banks has increased by five basis points year over year. Moreover, within a single quarter earlier this year, the delinquency rate for nonowner-occupied nonresidential property loans spiked by a significant 24 basis points. This has led to tighter lending standards at origination, reflecting the concerns of institutions. Further, financial institutions are taking proactive measures to mitigate CRE risk after origination. Some have set aside high-single-digit percentage allowances for office loans. Others have reduced exposure through portfolio sales. Overall, loan originations have fallen, CRE sales have slumped, and forecasts indicate a drop in CRE prices.

The tightening of lending standards, the slowdown in the growth of CRE loans, and the impact on loan originations have emerged as central concerns in the financial sector. What unifies these factors is their inherent risk and whether they act as warning signals or responses. Managing CRE credit risk is undeniably intricate, but leveraging available strategies and tools empowers community banks, credit unions, and financial institutions to effectively navigate the ever-changing CRE lending sector. This enables them to proactively assess and plan for risk mitigation, rather than merely react to these changes.

Understanding Commercial Real Estate Risk

As CRE loans represent a substantial part of many banks’ loan portfolios and higher yielding assets, especially within community financial institutions, understanding the significance of CRE credit risk is paramount. Community banks and credit unions often operate in areas experiencing job and population growth, leading to a high demand for CRE lending and, in turn, a high concentration of CRE loans. This growth and its corresponding effects on loan portfolio concentration pose new challenges for banks in terms of risk monitoring and control.

While larger financial institutions commonly maintain experienced staff and even entire departments to manage these risks, it is generally not cost effective for smaller financial institutions to hire and maintain qualified resources to help mitigate the inherent risks. In the absence of an internal CRE risk management team, it is imperative for financial institutions to rely on independent third-party resources to assist in this crucial process.

Historical Context and Lessons from Past Experiences

A retrospective examination underscores the importance of proactive risk management. Many significant historical banking failures were largely attributed to overinvestment in CRE loans and the lack of an effective risk management process. Weak underwriting standards and poor portfolio management led to an oversupply of CRE properties and borrower defaults. Over time, regulatory improvements, such as stricter underwriting and risk management requirements, have been implemented. Nevertheless, predicting the future remains uncertain. We can only analyze past patterns and the shortcomings to properly assess future risks.

In 2023, community and regional financial institutions comprise approximately 72% of the CRE loan market, taking on an above-average amount of CRE credit exposure. Recognizing such circumstances is vital, as you should be alert to potential red flags. Identifying and managing CRE credit risk is critical.

Identifying Emerging CRE Risk

A comprehensive understanding of CRE credit risk highlights the increasing complexity of its landscape. CRE credit risk is multifaceted, with numerous risk categories affecting CRE lending, including market risk, asset risk, liquidity risk, and credit risk, among others. To construct a robust risk management strategy, all these variables must be explored and considered.

To assess your financial institution’s CRE loan segment’s health, a systematic approach is needed. When determining if your CRE portfolio exceeds your institution’s risk appetite and how to quantify that risk and respond effectively, the answers lie in developing a comprehensive, tailored framework for assessing and analyzing your CRE loan market. The most recent regulatory interagency Statement on Prudent Risk Management for Commercial Real Estate Lending notes that institutions that successfully monitored risk have:

  • Established appropriate loan policies, underwriting standards, and concentration limits.
  • Conducted cash flow analyses based on realistic rates and expenses to ensure repayment ability and assessed borrowers’ ability to repay during interest rate fluctuations and loan structure changes.
  • Analyzed the impact of economic changes on the loan portfolio’s quality, earnings, and capital.
  • Provided boards and management with information to adapt lending strategies in changing market conditions.
  • Maintained information systems to manage concentration risk effectively.
  • Implemented appropriate appraisal review and collateral valuation processes.

With the many challenges faced by community financial institutions, the need to effectively identify, measure, and manage these risks has become paramount. While established best practices exist to address these risks, financial institutions must transition from assessing each risk in isolation to recognizing the interconnectedness and synergy between them. A more holistic approach to risk management is required, allowing institutions to confidently inform their capital planning, risk tolerance, and overarching strategy.

Strengthening CRE Risk Management in Community Financial Institutions

A comprehensive risk management strategy empowers financial institutions to adapt to market dynamics, instilling confidence among stakeholders and regulators. Alongside the factors discussed in the previous section, regulatory guidelines highlight two critical facets of CRE risk management: stress testing and portfolio reviews. While community financial institutions can execute these internally, outsourcing can offer efficiency and effectiveness.

CRE Portfolio Stress Testing

Stress testing and sensitivity analyses are indispensable tools for evaluating CRE risk and gauging the impact of economic fluctuations on asset quality, earnings, and capital. These assessments should align with the portfolio’s size and risk profile. CRE stress tests inform strategic and capital planning, credit concentration limits, policy, and underwriting. Integrating stress testing into risk management and strategic planning is essential to anticipate and mitigate risks, especially given current market uncertainties.

Although loan-level stress testing serves a purpose on a transactional level at origination, financial institutions should also regularly perform portfolio-level stress testing that encompasses a bottoms-up and a top-down approach. The bottom-up approach allows financial institutions to gauge the risks of individual, seasoned loans by stressing each transaction through interest rate changes, collateral values, and other market factors. Implying moderate and high stress scenarios to each transaction allows for early identification of potential losses and their impact on the capital of your organization. The top-down approach takes the remaining portfolio not identified on a loan-level analysis and uses the same stressors to further identify any possible impact to capital.

Independent Loan Reviews for CRE Risk Mitigation

Thorough loan reviews are pivotal for identifying and mitigating potential CRE portfolio risks. They enable banks to assess loan quality, maintain compliance with regulations, and make necessary adjustments on a loan and portfolio level. An effective loan review function is crucial for assessing asset quality, evaluating underwriting and ongoing monitoring, and identifying exceptions to policies. Proactive issue resolution ensures risk mitigation before regulatory scrutiny or asset quality deterioration.

To further safeguard against future losses, it is critical that a loan review be independent. If maintained internally at the organization, it should report directly to the audit committee of the board of directors or the full board of directors. If a third-party firm is contracted to perform this work, it too should report all findings to the board of directors or a committee thereof.

Tactical Approaches to Limit CRE Risk in an Unpredictable Market

To minimize exposure to CRE credit risk, institutions should enhance communication with borrowers, allocate additional resources for portfolio management, understand collateral, and manage interest rate risk. Effective market area monitoring, adaptable to the institution’s unique risk exposure and appetite, is essential. Clear communication of risk tolerance from the board down to lending staff fosters alignment and clarity.

Community financial institutions must not become complacent in their approach to risk management. It is critical to remain agile and continually adapt to changing environments and emerging risks, especially in the currently volatile realm of CRE lending. By staying proactive and employing a comprehensive risk assessment and management approach, banks and credit unions can successfully address CRE credit risk, safeguard their portfolios, and maintain their success.

Optimize Your Risk Management Strategies with Young & Associates

With over four decades of experience, Y&A specializes in helping community financial institutions manage risk. Our enduring presence in the industry reflects our ability to adapt to evolving financial landscapes. Our seasoned consultants, who have backgrounds in banking, bring firsthand experience of market fluctuations.

Outsourcing CRE Stress Testing

Young & Associates offers a CRE portfolio stress testing service that efficiently and insightfully assesses your portfolio. Using data specific to your bank, we stress your CRE portfolio across various factors. Our report quantifies potential impacts on earnings and capital resulting from collateral value decreases, changes in property net operating incomes, or increases in interest rates. What sets us apart is our ability to handle the stress testing process efficiently, allowing your institution’s management to focus on other important initiatives.

Outsourcing Loan Review

For most community financial institutions, outsourced loan review is the best choice due to size and the need for an independent party. Our loan review service, applied to your CRE portfolio, not only uncovers individual credit assessments but also evaluates the alignment of your credit standards, analysis, and continuous credit monitoring with the specific characteristics of your CRE portfolio. Our findings not only inform you about existing portfolio risks but also provide recommendations for effective risk management.

Contact us to explore how we can support your journey in addressing CRE credit risk effectively.

The Art of Safe Lending: How to Mitigate Commercial Loan Underwriting Risks

Written by admin on . Posted in Advice, Commercial Underwriting, Consultation, Lending & Loan Review.

By: Ollie Sutherin, Principal of Y&A Credit Services

Community financial institutions have long been known for their agility and personalized service, excelling at creating unique lending solutions and facilitating distinct transactions. However, the very attributes that have set them apart may now present fresh challenges as they seek to expand. Community banks and credit unions find themselves navigating a delicate equilibrium: effectively managing underwriting risk, diversifying their loan portfolios, and growing to better serve their communities. 

Additionally, the world of commercial loan underwriting presents its own distinctive challenges that further complicate finding this equilibrium. Commercial loan underwriting standards, in particular, are designed to foster relationship banking rather than transactional interactions. Loans are underwritten based on the borrower’s anticipated ability to operate their business profitably and service the debt being requested. However, the actual cash flows of borrowers can often deviate from expectations, and the value of collateral securing these loans may fluctuate. Most commercial loans are secured by the assets they finance, along with other business assets such as accounts receivable or inventory, and sometimes entail personal guarantees. Loans secured by accounts receivable heavily rely on the borrower’s ability to collect due amounts from customers. These complexities create a web of considerations for underwriters. 

Effective management of a community financial institution’s loan portfolio necessitates a strategic approach guided by skilled underwriters who play a pivotal role in mitigating underwriting risks in commercial lending. 

The After Effects of the SVB Collapse 

A little over six months have passed since the financial world experienced a seismic shift when a prominent regional bank collapsed. This event sent shockwaves throughout the banking sector, triggering a chain reaction that affected numerous other financial institutions, both regional and local. These far-reaching consequences have also left their mark on various aspects of community bank and credit union operations. 

Risk management has always held a pivotal role in credit underwriting, and its significance has become more pronounced in today’s ever-volatile environment. As we navigate an era of monetary tightening, global inflationary pressures, and increasing interest rates, underwriters find themselves under increased scrutiny. In the past, cheap funding was abundant, but now, risk-appropriate pricing is paramount for funding new deals. Underwriters must balance a new interest rate environment with the heightened lending and refinancing risks, necessitating increased diligence in risk assessments when extending credit and negotiating terms. 

To shed light on this matter, we will explore effective strategies for community financial institutions to limit underwriting risk in commercial lending, ensuring they can thrive while maintaining a prudent approach to lending.  

Comprehensive Credit Analysis 

The cornerstone of any sound underwriting process is conducting a comprehensive credit analysis. This involves digging deep into the current financial health of the borrower, their business, and the industry they operate in. By meticulously assessing factors like cash flow, collateral, and credit history, you can gain a clearer picture of the borrower’s ability to repay the loan. 

Moreover, consider working with an experienced outsourced credit underwriting service like Y&A Credit Services to ensure you have access to the latest data, analytical tools, and expertise in evaluating commercial loans. Our team of experts can assist from reviewing your analysis to completely underwriting the transaction, ensuring you have all the information to help you make informed lending decisions. 

Diversification of Loan Portfolios 

Diversification is a risk management principle that rings true in commercial lending as well. By diversifying your loan portfolios across various industries and business types, you can reduce your exposure to sector-specific risks. A balanced mix of loans in manufacturing, real estate, healthcare, and other sectors can help buffer your institution against economic downturns that may affect a particular industry. 

Loan Covenants and Monitoring 

Establishing clear and enforceable loan covenants is another key step in limiting underwriting risk. These covenants set out the terms and conditions under which the borrower must operate and repay the loan. Regularly monitoring the borrower’s compliance with these covenants and requesting the most current information from your borrower is equally important. It allows you to detect early warning signs of financial distress and take corrective action sooner when you have more options for a successful outcome for both your borrower and your institution. 

Loan Portfolio Stress Testing 

In an ever-changing economic landscape, stress testing is an invaluable tool for gauging how your loan portfolio would perform under adverse conditions. By modeling various scenarios against your portfolio, you can assess your institution’s vulnerability to economic shocks and make proactive adjustments to your lending practices. 

Ongoing Training and Education 

Staying up to date with the latest industry trends, regulations, and best practices is essential. Encourage your staff to engage in ongoing training and education programs related to commercial lending and underwriting. This ensures that your institution’s underwriting processes remain current and effective. 

Regular Commercial Loan Underwriting Reviews 

To maintain the health of your loan portfolio, it’s crucial to conduct regular reviews of your commercial loan underwriting practices. This ensures that your institution’s standards and processes align with the evolving landscape of commercial lending. It also allows you to make necessary adjustments and refinements to minimize underwriting risks continuously. 

Outsourcing Commercial Credit Underwriting 

Third party assistance for commercial credit underwriting can be a strategic move to ensure the accuracy and effectiveness of your underwriting processes and relieve your institution of the need to maintain an up-to-date full-time staff.   Professional outsourced services, like Y&A Credit Services, offer expertise, access to advanced analytical tools, and an impartial perspective, helping your institution make sound lending decisions and maintain high underwriting standards.  These services can be implemented from fully outsourced to fractional, helping assist during peaks in volume.  

Y&A Credit Services’ Guidance in Commercial Underwriting 

Mitigating underwriting risk in commercial lending stands as a pivotal cornerstone for upholding the financial health and stability of community banks and credit unions, especially in the wake of the industry upheaval earlier this year. By implementing comprehensive credit analysis, diversifying loan portfolios, enforcing loan covenants, conducting stress tests, and investing in ongoing training, regular reviews, and outsourcing, you can confidently navigate the complexities of commercial lending while minimizing risks and enhance your institution’s lending capabilities. 

At Y&A Credit Services, we understand the importance of risk management in commercial lending, and we’re here to guide you through the process. Our outsourced credit underwriting services are designed to provide community banks and credit unions with the expertise and resources needed to make sound lending decisions. Together, we can build a more secure lending future for your institution, helping our communities one loan at a time. 

Contact us today to learn how we can help. 

The Role of Loan Review in the Credit Risk Management System

Written by admin on . Posted in Uncategorized.

By: David Reno, Director of Loan Review & Lending Services

Loans, especially non-consumer loans, typically represent the greatest level of risk on your balance sheet. Therefore, effective commercial loan portfolio management is crucial to control credit risk. It can serve as an early indicator of emerging credit risk related to lending to individual borrowers, aggregate credit exposure to related borrowers, and the overall credit risk associated with a loan portfolio. It serves as an integral part of an institution’s credit risk management system that is a continuum comprised of the following stages:

  • Well-formulated lending policies, procedures, and practices that are consistently applied, well-known to all credit and lending staff, and compliant with regulatory guidance
  • The collection and accurate credit analysis of financial and other underwriting information
  • Assignment of an accurate risk grade
  • Proper and qualified approval authorities and risk-based process
  • Correct and thorough documentation
  • Pre-closing preparation and loan closing
  • Post-closing credit administration
  • Internal annual loan review
  • External/independent loan review
  • Timely problem loan identification and management
  • Proper calculation of the ALLL
  • Collection and loss mitigation

Effective and efficient loan reviews can help an institution better understand its loan portfolio and identify potential risk exposures to contribute to the formulation of a risk-based lending and loan administration strategy.

Regulatory Background

The OCC, FRB, FDIC, and NCUA issued the Interagency Guidance on Credit Risk Review Systems in FIL-55-2020 dated May 8, 2020, which aligns with Interagency Guidelines Establishing Standards for Safety and Soundness. This guidance is relevant to all institutions supervised by the agencies and replaces Attachment 1 of the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. The final guidance details the objectives of an effective credit risk review system and discusses such topics as sound management of credit risk, a system of independent, ongoing credit review, and appropriate communication regarding the performance of the institution’s loan portfolio to its management and board of directors.

Credit Risk Rating (or Grading) Framework

The foundation for any effective credit risk review system is accurate and timely risk ratings. These risk ratings are used to assess credit quality and identify or confirm problem loans. The system generally places primary reliance on the lending staff to assign accurate, timely risk ratings and identify emerging loan problems. However, the lending personnel’s assignment of risk ratings is typically subject to review by qualified and independent peers, managers, loan committee(s), internal credit review departments, or external credit review consultants that provide a more objective assessment of credit quality.

Elements of an Effective Credit Risk Review System

The starting point is a written credit risk review policy that is updated and approved at least annually by the institution’s board of directors or board committee to evidence its support of and commitment to maintaining an effective system. Effective policies include a description of the overall risk rating framework and responsibilities for loan review.

An effective credit risk review policy addresses the following elements:

Qualifications of Credit Risk Review Personnel. The level of experience and expertise for credit risk review personnel is expected to be commensurate with the nature of the risk and complexity of the loan portfolio, and they should possess a proper level of education, experience, and credit training, together with knowledge of generally sound lending practices, the institution’s lending guidelines, and relevant laws, regulations, and supervisory guidance.

Independence of Credit Risk Review Personnel. Because of their frequent contact with borrowers, loan officers, risk officers, and line staff are primarily responsible for continuous portfolio analysis and prompt identification and reporting of problem loans to proactively identify potential problems. While larger institutions may establish a separate credit review department, smaller institutions may use an independent committee of outside directors or other qualified institution staff. These individuals should not be involved in originating or approving the specific credits being assessed, and their compensation should not be influenced by the assigned risk ratings. Regardless of the approach taken, it is prudent for the credit risk review function to report directly to the institution’s board of directors or a committee thereof. Senior management should be responsible for administrative functions.

The institution’s board of directors may outsource the role to a third-party vendor; however, the board is ultimately responsible for maintaining a sound credit risk review system.

Scope of Reviews
Comprehensive and effective reviews cover all segments of the loan portfolio that pose significant credit risk or concentrations. The review process should consider industry standards for credit risk review coverage, which should be consistent with the institution’s size, complexity, loan types, risk profile, and risk management practices. This consideration helps to verify whether the review scope is appropriate.

An effective scope of review is risk-based and typically includes:

  • Loans over a predetermined size along with a sample of smaller loans
  • Loans with higher risk indicators, such as low credit scores or approved as exceptions to policy
  • Segments of loan portfolios, including retail, with similar risk characteristics, such as those related to borrower risk (e.g., credit history), transaction risk (e.g., product and/or collateral type), etc.
  • Segments of the loan portfolio experiencing rapid growth
  • Past due, nonaccrual, renewed, and restructured loans
  • Loans previously criticized or adversely classified
  • Loans to insiders, affiliates, or related parties
  • Loans constituting concentrations of credit risk and other loans affected by common repayment factors

 Review of Findings and Follow-Up

A discussion of credit risk review findings should be held with management, credit, and lending staff and should include noted deficiencies, identified weaknesses, and any existing or planned corrective actions and associated timelines.

Communication and Distribution of Results

The results of a credit risk review are presented in a summary analysis with detailed supporting information that substantiates the concluded risk ratings assigned to the loans reviewed. The summary analysis is then periodically presented to the board of directors or board committee to maintain accountability and drive results. Comprehensive reporting includes trend analysis regarding the overall quality of the loan portfolio, the adequacy of and adherence to internal policies and procedures, the quality of underwriting and risk identification, compliance with laws and regulations, and management’s response to substantive criticisms or recommendations.

Summary Insights

The back-testing that is performed by the loan review process is necessary to ensure that an institution has in place a comprehensive and effective credit risk management system and that an institution acknowledges and practically applies the established framework of its unique but compliant credit culture.

An effective external loan review process is not so much a traditional audit exercise as it is an advisory process that produces meaningful dialogue between the review firm and the institution that seeks to identify and interpret various aspects of credit risk to minimize risk of loss by implementing industry best practices, maintaining regulatory compliance, and supporting the institution’s long-term viability in continuing to serve the needs of its customers and community.

For more information on the role of loan review in the credit risk management system, contact David Reno, Director of Loan Review & Lending Services, at dreno@younginc.com or 330.422.3455.

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