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Assess, Plan, and Effectively Respond to Today’s Market Challenges

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By: Jerry Sutherin, President & CEO

In today’s dynamic market, some of the biggest challenges faced by our clients include but are not limited to interest rate risk management, liquidity, capital adequacy, and commercial loan underwriting. These issues are magnified by the ability of our clients to locate, hire, and retain quality human capital to operate effectively and efficiently.

Interest Rate Risk Management

Rising or fluctuating interest rates impact your financial institution’s growth prospects in both the short and long term. Not only do interest rates pose a risk to a financial institution’s balance sheet, but they also impede the ability to effectively produce reliable financial statement forecasts. A financial institution’s Net Interest Margin (NIM) is a key component of each income statement. Being able to adequately forecast interest income as well as internal cost of funds allows an institution to produce a reliable budget. To overcome this, financial institutions must identify, measure, monitor, and control interest rate risks to meet the requirements of the Joint Policy Statement on Interest Rate Risk (IRR) and the IRR regulatory guidance. Effective control of the interest rate risk will require conducting annual independent reviews of the asset liability management (ALM) function and validating your risk measurement systems to ensure their integrity, accuracy, and reasonableness. This will also involve internal controls of loan and deposit pricing. Establishing and maintaining these controls should begin at the board level and flow through management.

Credit Risk Management

Rising interest rates have also had a profound impact on credit quality of commercial lending, one of the primary drivers of revenue for most financial institutions. The change in credit quality results in the tightening of credit standards throughout the industry and by the regulators. Being able to effectively underwrite loans and mitigate risks within a commercial loan portfolio is a function of having seasoned staff to manage these processes. Lack of quality credit talent exposes financial institutions to otherwise preventable credit risks. The dilemma for most financial institutions is finding, hiring, and maintaining experienced personnel. In some instances, this has resulted in inadequate credit presentations being prepared by unqualified individuals or loan officers underwriting their own credits for approval. The increasing burden of inflation and wages adds another layer of complexity to the mix. Many community-focused institutions are not willing or able to pay top rate for talent, which is understandable given the need and focus to remain competitive among the larger regional and national banks that continue to acquire and/or out-compete them.

Liquidity Risk Management

Another impact of a higher interest rate environment and inflation is the disintermediation of funds or liquidity from financial institutions to other financial intermediaries. Sound liquidity management is crucial for controlling your organization’s liquidity risk and managing cash flow to meet expected and unexpected cash flow needs without adversely affecting daily operations. Your financial institution should assess the range of possible outcomes of contemplated business strategies, maintain contingency funding plans, position for new opportunities, and ensure regulatory compliance and the adequacy of your risk management practices.

Capital Planning

Both interest rate risk management and liquidity management have a direct impact on the capital adequacy of all financial institutions. Capital contingency planning will ensure that your financial institution maintains the required level of capital through any realistic stress event. Periodic review of minimum capital requirements and stress tests can provide valuable insights and will maintain your standing with the regulators.

The Importance of Strategic Planning

So far, this article has only discussed the challenges faced by the financial institution industry. These obstacles are not just management issues. They are also issues that boards of directors must navigate as well.

Are there solutions? Absolutely — yes there are. Boards of directors and management must be aligned on all strategic initiatives. These objectives need to be derived and adopted by the board and conveyed to management. The most common approach is through a focused strategic planning session involving the board and management. The outcome of such a retreat will enable the board to identify goals and risks faced by the organization while also deciding on how the goals will be accomplished and the risks mitigated. This could be through the utilization of qualified internal staff or engaging outside experts to assist with each objective. An effective strategic plan will incorporate all these pieces to help guide your organization as you navigate the changing industry landscape.

Partner With Us for Success

For 45 years, Young & Associates, Inc. (www.younginc.com) has partnered with banks and credit unions across the country to provide consulting, outsourcing, and educational services to minimize their risk and maximize their success. Our services cover areas such as interest rate risk analysis, liquidity planning, assessment of capital adequacy strategic planning, regulatory assistance, internal audit, independent loan review, IT audits and penetration testing, and regulatory compliance assessment, outsourcing and training. Our team of consultants boasts an unmatched level of industry experience and is comprised of former banking executives, compliance regulators, and tenured finance professionals who have personally experienced many of the same issues you face at your organization.

For commercial credit needs, Y&A Credit Services is a full-service provider of outsourced underwriting services and credit analysis. An independent entity, Y&A Credit Services offers the same exceptional service, expertise, and integrity you’ve learned to expect from Young & Associates, Inc., and provides commercial credit underwriting and credit approval presentations, annual underwriting reviews, financial statement spreading and analysis, and approval and underwriting package reviews. We’ll work with you to improve the quality, speed, and accuracy of your lending with a solid focus on minimizing your credit risk. Our team members are experts in credit services and the financial industry and include former chief credit officers and senior credit analysts from both community and regional banks and provide full outsourced credit department services to our clients, keeping their costs low so they can remain competitive in their markets. Our seasoned credit professionals boast a combined 100+ years of experience in credit administration which helps mitigate risks while assisting our clients with safe and sound underwriting processes.

We look forward to assisting your bank or credit union in meeting these challenges head on. Find out more about the many services we provide at www.younginc.com (Young & Associates, Inc.) and www.yacreditservices.com (Y&A Credit Services). Or contact us directly by emailing Jerry Sutherin, President & CEO, at jsutherin@younginc.com or calling him directly at 330.422.3474

The Role of Loan Review in the Credit Risk Management System

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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.

In Loving Memory – Kyle Curtis

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May 5, 1961 – January 7, 2023

With great sadness, we announce that Kyle Curtis, of Chandler, AZ, passed away unexpectedly on January 7, 2023. Born on May 5, 1961, Kyle had more than 30 years of diverse banking experience in financial reporting, lending, credit authority and administration, and senior management level positions. He spent his entire career as a banker in Arizona, starting at the entry level and working his way up to serving in several executive leadership positions before becoming a banking consultant.

At Young & Associates, Kyle was a dedicated leader, manager, mentor, and teammate for over 11 years. He was a vital part of the lending and management divisions of the company and served as the Director Management Services since 2019. He assisted his clients through the de novo formation process, those under regulatory enforcement agreements, management and board of director assessments, appraisal reviews, loan reviews and ALLL/CECL methodology reviews, loan portfolio stress testing, and policy development and implementation.

Jerry Sutherin, President & CEO at Young & Associates, reflected on Kyle’s passing and contribution to the company…

“Kyle’s work ethic and understanding of the banking industry were unparalleled. He was always willing to assist co-workers and clients by conveying this knowledge with logic and occasionally humor. However, more important than our peer-to-peer relationships that we all maintained with Kyle, he was a dear friend to everyone. He will be missed by everyone that he met.”

Kyle is survived by his loving wife, Mary; son, Ryan (Alycia) Curtis; daughters, Sara (Nick) McCord, Katelyn (Jonathan) Curtis; and granddaughter, Ella Curtis.

Both personally and professionally, Kyle’s talent, dedication, leadership, and friendship will be greatly missed by our corporate family here at Young & Associates, as well as so many bankers across the country.

Upcoming Webinars

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The most important investment a financial institution can make is in the training of its employees. Young & Associates is a national leader in continuing education and training programs for financial professionals.

Upcoming Webinars in 2023

Date                                      Topic

April 28                                1071 Rule Changes

May 15                                  Regulation E – Who is Responsible When Things Go Wrong

June 26                                Mistakes to Avoid on Loan Estimates

July 24                                  Fair Lending Disasters

September 18                     BSA for New Employees

November 20                      SAR Disasters

December 4                        Avoiding CTR Errors

With years of experience, our consultants offer an unmatched level of real-world expertise across a variety of educational topics including lending and underwriting, regulatory compliance, director development and more. For more information, click here.

Brushing Up on Disclosures for ARMs

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By: William J. Showalter, CRCM, CRP, Senior Consultant

Now that interest rates are moving up, many bankers are blowing the dust off their adjustable-rate mortgage (ARM) loan offerings. Interest rates for fixed-rate loans have been so low for quite some time, which made them much more appealing to mortgage loan customers. But now with rates increasing, the lower initial rates of ARM loans are beginning to look more appealing to at least some borrowers.

The problem is that many of us are so out of practice at making ARMs that we need a refresher to remind us of what we need to do. This article will serve as a primer to help us re-learn how to meet disclosure requirements for ARM loans.

Different Types of ARMs

When we think of an adjustable-rate mortgage, the first thing that comes to mind is likely the classic loan with an interest rate that can change at some regular interval based on the movement of some external index. There is a wide variety of initial time periods for which the rate is fixed and later intervals for rate changes over the life of the loan. Common initial fixed periods are one, three, five, seven, or 10 years, while probably the most common interval for later rate changes is one year.

But that is not where the variety of ARMs ends. The Official Staff Commentary on Regulation Z discusses a number of other loan structures that are considered to be variable-rate transactions subject to the ARM disclosure requirements. These additional loan structures are:

  • Renewable balloon-payment loans where the creditor is both unconditionally obligated to renew the balloon-payment loan at the consumer’s option (or is obligated to renew subject to conditions within the consumer’s control) and has the option of increasing the interest rate at the time of renewal
  • Preferred-rate loans where the terms of the legal obligation provide that the initial underlying rate is fixed but will increase upon the occurrence of some event (e.g., an employee leaving the employ of the creditor, or an automatic payment arrangement being ended) and the note reflects the preferred rate (though a number of the ARM disclosures are not required for preferred-rate loans)
  • “Price-level-adjusted mortgages” or other indexed mortgages that have a fixed rate of interest but provide for periodic adjustments to payments and the loan balance to reflect changes in an index measuring prices or inflation (again a number of the ARM disclosures are not required for price-level-adjusted loans)

It is important to note that graduated-payment mortgages and step-rate transactions without a variable-rate feature are not considered variable-rate transactions under Regulation Z. This is likely because changes over the term of the loan are known at the outset – specified payment and/or interest rate increases.

Application Disclosures

Two ARM disclosures must be given to applicants for such loans at the time an application form is provided or before the consumer pays a non-refundable fee, whichever is earlier. There is an exception allowing the disclosures to be delivered or placed in the mail not later than three business days following receipt of a consumer’s application when the application reaches the creditor by telephone or through an intermediary agent or broker.

For an application that is accessed by the consumer in electronic form – including an online application portal – the required ARM disclosures may be provided to the consumer in electronic form on or with the application.

These two early ARM disclosures are:

  • The booklet titled Consumer Handbook on Adjustable-Rate Mortgages (CHARM booklet), or a suitable substitute, and
  • A loan program disclosure for each variable-rate program in which the consumer expresses an interest (each comprised of 12 specified pieces of information about the ARM program)

TRID Disclosures

The Loan Estimate (LE) and Closing Disclosure (CD) both require some additional disclosures for ARMs. The LE must be provided to an applicant no later than the third business day after their application is received by the lender, while the CD must be provided no later than three business days before consummation. (There are also situations permitting or requiring these disclosures to be revised, but that’s a subject for another time.)

The particular TRID (TILA-RESPA Integrated Disclosures) items impacted by a loan being an ARM are:

  • “Interest Rate” in the “Loan Terms” section – If the interest rate at consummation is not known, the rate disclosed must be the fully-indexed rate, which means the interest rate calculated using the index value and margin at the time of consummation. The lender also should disclose “Yes” for the question “Can this amount increase after closing?” In addition, disclose the frequency of interest rate adjustments, the date when the interest rate may first adjust, the maximum interest rate, and the first date when the interest rate can reach the maximum interest rate, followed by a reference to the Adjustable Interest Rate (AIR) Table (discussed below).
  • “Monthly Principal & Interest Payment” in the “Loan Terms” section – If the initial periodic payment is not known because it will be based on an interest rate at consummation that is not known at the time the LE must be provided, for example, if it is based on an external index that may fluctuate before consummation, this disclosure must be based on the fully-indexed rate disclosed above. The lender also should disclose “Yes” for the question “Can this amount increase after closing?” In addition, disclose the scheduled frequency of adjustments to the periodic principal and interest payment, the due date of the first adjusted principal and interest payment, the maximum possible periodic principal and interest payment, and the date when the periodic principal and interest payment may first equal the maximum principal and interest payment.
  • “Principal & Interest” payment in the “Projected Payments” section – The table of payments (principal and interest, mortgage insurance, etc.) will include more than one column due to the possible (projected) changes in the interest rate, up to a maximum of four columns. The maximum principal and interest payment amounts (in each column) are determined by assuming that the interest rate in effect throughout the loan term is the maximum possible interest rate, and the minimum amounts are determined by assuming that the interest rate in effect throughout the loan term is the minimum possible interest rate. If the ARM has a negative amortization feature, the maximum payment amounts must reflect this feature, as spelled out in Regulation Z.
  • “Adjustable Interest Rate (AIR) Table” – An ARM must disclose a separate table in the “Closing Cost Details” section on the LE and the “Additional Information About This Loan” section on the CD, under the heading “Adjustable Interest Rate (AIR) Table,” that contains specified information about the index and margin, increases in the interest rate, initial interest rate, minimum and maximum interest rate, frequency of adjustments, and limits on interest rate changes.
  • “Annual Percentage Rate (APR)” and “Total Interest Percentage (TIP)” in the “Comparisons” section on the LE and the Loan Calculations section on the CD – Calculation of both these values must account for variations in the interest rate permitted for the ARM.

Interest Rate/Payment Change Notices

The creditor, assignee, or servicer of an ARM secured by a borrower’s principal dwelling must provide consumers with written notices in connection with the adjustment of interest rates in accordance with the loan contract that results in a corresponding adjustment to the payment.  These notices must be separate from any other disclosures or notices.

There are exemptions for the following: ARMs with a term of one year or less; first interest rate adjustment to an ARM if the first payment at the adjusted level is due within 210 days after consummation and the new interest rate disclosed at consummation was not an estimate; or when the lender/servicer is subject to the Fair Debt Collection Practices Act (FDCPA) for the loan and the customer has sent a notice to cease communications.

The content for these change notices is spelled out in detail in Regulation Z and the timing depends on whether the rate/payment change is the first one to occur for the ARM loan or a subsequent change.

  • The initial adjustment notice must be provided to consumers at least 210 days (but no more than 240 days) before the first payment at the adjusted level is due. If the first payment at the adjusted level is due within the first 210 days after consummation, the disclosures must be provided at consummation.
  • All subsequent adjustment notices generally must be provided to consumers at least 60 day (but no more than 120 days) before the first payment at the adjusted level is due. The disclosures must be provided to consumers at least 25 days (but no more than 120 days) before the first payment at the adjusted level is due for ARMs with uniformly scheduled interest rate adjustments occurring every 60 days or more frequently and for ARMs originated prior to January 10, 2015 in which the loan contract requires the adjusted interest rate and payment to be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date.

Periodic Statements

If your bank has taken advantage of the “coupon book” exception from periodic statements for mortgage loans with fixed rates, you will have to begin producing periodic statements when you begin originating ARMs. Or, you will need to expand your statement output as more of the bank’s loan production shifts to ARMs from fixed-rate loans (if you still want to use the coupon books exception for your fixed-rate lending).

Conclusion

If your institution is like many community banks and has not been making ARMs for some time, you likely have some work to do to ramp ARM lending back up. Systems and disclosures need to be updated and/or activated. Disclosures need to be procured or prepared. Staff needs to be trained, at least some refresher training.  Good luck re-ARMing up.

Embracing New Technology ̶ “Lead, Follow, or Get Out of the Way”

Written by admin on . Posted in Information Technology, Management & Planning.

By: Bill Elliott, CRCM, Director of Compliance Education

I have been teaching for Young and Associates for over 20 years. Twenty years ago, when I asked about “the percentage of customers that enter your lobby in any given month,” the answers I got from attendees were usually around 80%. Twenty years later, the answers are almost always under 25%. Just recently a banker in a seminar told me that they have a branch that has almost no foot traffic.

The reason for this change is obvious ̶ why go to the bank or credit union when you can do it electronically? And the generations of customers coming up are more than willing to figure out how to do it on their smartphone. Since banking via your smartphone is readily available to anyone who has a decent cell signal, it is hard to argue with that position.

The problem for financial institutions is the constant struggle with technology and finding ways to leverage it better and faster. And the last two years of COVID have exacerbated the problem greatly, as customers were either reluctant to leave their homes, or institutions were unable to service customers except through perhaps the drive-through window. The result of all this is that some financial institutions have lost customers due to the lack of technology, while others have done very well because they had the technology available and could enable it to serve their customers.

Another question I ask in seminars is, “How many of you believe that you will get to retirement before your institution is opening accounts online?” If I have a 60-something person in the crowd, maybe I will get a hand raised. For everyone else, they can see it is either here or coming soon.

Embracing Change
Management sometimes is reluctant to embrace change, which is understandable, as few enjoy it. But not changing may come at a cost that your organization is not willing to pay. To remain independent, financial institutions must step out of the comfort zone of, “We have always done it this way” and embrace the technology necessary for their survival and for their consumers’ needs. Pretending that it simply isn’t going to happen will not work ̶ it has already happened.

One of our clients is situated in an area where cows outnumber people three to one. Around 90% of their mortgage applications come in electronically and the bank encourages applicants to do it electronically, as that speeds the process up. A loan that closes faster means that the organization makes more money earlier, certainly a worthwhile goal.

On the deposit side, watch any football game, and major financial institutions tout the abilities that are available to the customer using their smartphone. One bank indicates that you can open a checking account online in five minutes. I’ve never tried it, but since the average customer takes more than five minutes to choose their check style, I’m not sure it is 100% accurate. But it is the wave of the future, or perhaps I should say the wave of the present.

Tips to Consider
After you decide why your organization wants to invest and leverage new technology (gain more customer insight, improve customer experience, penetrate new markets, etc.), here are some basics that you need to consider:

  • First, what systems are available that interface easily with your core processing system? If you cannot interface, you probably ought not be interested. The goal is to make everything flow from space to space to space with a minimum of human intervention, with high-quality information at each step to support why you are making this investment. While admittedly that means your staff must pay attention to get everything correct early in the process, once you do that, completing the transaction should be fairly simple. If your core processing system supports very little that would be useful to you in this new electronic banking world, it is possible that you may need to consider replacing it with something a little more flexible.
  • Second, you need to have the ability internally to manage the new processes and technologies. And you need to ensure that you have the training available to your staff so that they understand their role and responsibilities necessary to support your customer base.

There is no question that all this costs money ̶ but not doing anything also carries costs. Some of the cost of new technology may be offset by closing branches that are not necessary as these new delivery systems grow and mature. Closing a branch has its own real dollar costs, and management must assure that the closure will not impact the organization’s Community Reinvestment Act or fair lending positions. All this needs to be considered – and maybe discussed with regulators – before closing a branch. And even if you do not close a branch, some savings is possible with a reduction in your overall staffing levels.

I personally have a checking account that I really don’t need anymore, but I have several bills paid out of that checking account directly. Since the account is free, I’ve never bothered to do anything other than adequately fund the account, because moving all those transactions to my “main” checking account seems just too cumbersome. So, the technology keeps me a customer.

Once customers begin to intertwine bill pay, budget models and other products, they may think long and hard before unpacking all these services to move the account and business somewhere else. The digital experience is just as impactful to the overall customer experience as face-to-face contacts. And an integrated digital platform may help retain customers that may not be thrilled with your organization; however, the digital experience becomes so difficult to “unpack” that they accept their pain points and continue to remain customers. This retention provides you the time to address their pain points and transform them into advocate customers speaking highly of your quality of services to others.

“Lead, Follow, or Get Out of the Way”
Years ago, I heard the phrase, “Lead, follow, or get out of the way.” That certainly is our world today. Your best possible position is to be a leader. If you choose to follow, you may do just fine. But if you try to simply get out of the way, you may find yourself in a difficult position. So, you must consider your options here, and frankly do it very quickly.

Many in the industry are talking about Banking as a Platform (BaaP), Digital Transformation, and Banking as a Service (BaaS). These are all different concepts, yet all very relevant and available. It is our hope you make the choice to “lead” or “follow” closely and have your customers or new markets choose you for banking services. Please do not “get out of the way,” as it will be more challenging for you and your organization in the long run. Given how quickly technology and related issues advance, the “long run” is now measured in shorter and shorter time frames.

For more information on this article and how Young & Associates can assist your organization to position your organization to leverage technology to better serve your customers, contact us at mgerbick@younginc.com or 330.422.3482.

Young & Associates Introduces Y&A Credit Services, LLC

Written by admin on . Posted in Announcements, News, Uncategorized.

We are proud to introduce a new line of business through an affiliated organization of Young & Associates, Inc.: Y&A Credit Services, LLC.

Y&A Credit Services is a full-service provider of outsourced underwriting and credit services and offers various commercial underwriting and credit services such as:

  • Commercial Credit Underwriting and Credit Approval Presentations
  • Annual Underwriting Reviews
  • Financial Statement Spreading and Analysis
  • Approval and Underwriting package reviews

“Y&A Credit Services understands the challenges that financial institutions nationwide face with locating and retaining skilled credit department staff who can efficiently produce trustworthy credit risk management results while supporting an increasing volume of workflow,” said Jerry Sutherin, President & CEO of Young & Associates. “We offer an effective solution to this dilemma by employing our experienced staff, technology, and proven processes to enhance your credit administration process, mitigate credit risk, and ensure continued profitable loan portfolio growth and performance.”

Completely independent from Young & Associates, Inc. and with a name you trust, Y&A Credit Services can help large and small financial institutions increase the quality, accuracy and speed of their lending while mitigating risks in a highly regulated industry. “We are an independent entity, but we offer the same exceptional service, expertise, and integrity you’ve learn to expect from Young & Associates,” says Ollie Sutherin, Principal of Y&A Credit Services.

Visit yacreditservices.com to learn more about the new company and explore the website. And if our services sound like a viable solution to your current challenges, contact Ollie Sutherin by email at osutherin@younginc.com or phone at (330) 422-3453. We would be happy to discuss how we can help your credit department and institution achieve its objectives.

Annual Reviews of Commercial Credits

Written by admin on . Posted in Uncategorized.

What is the overall condition of your commercial loan portfolio? Do you focus on net charge-offs? Delinquencies? Financial statement exceptions to policy? Number and level of TDRs and non-accruals? The percent of the ALLL to total loans? While all of these broad measures can be helpful, the number and nature of grade changes coming from internal annual reviews are likely to be timelier and more accurate than all of the other measures combined.

Does your credit policy contain specific criteria describing relationships which must receive annual reviews? If so, have you recently evaluated whether that level remains appropriate for your portfolio today? The commercial annual review threshold should be set at a level where the required reviews will cover at least 50% of commercial exposures. Each bank should do a sort of the commercial portfolio and determine what level of exposure will yield the desired coverage ratio. The annual review requirements should differ from the Watch List or Special Asset requirements as the annual reviews should be separate from those assets already identified with some level of weakness.

Now that you have set an annual review requirement, what elements of a credit analysis should be completed? Although the ultimate goal is to determine the accuracy of the risk rating, regulators will be looking for the robustness of the annual review in order to “sign off” or accept the annual review results. In addition to providing executive management and the board with timely and accurate results, a solid and meaningful annual review process can help to build confidence in your systems with the regulators and potentially allow for a more efficient third-party loan review.

Minimum requirements for annual review activities should be built into the loan or credit policies so that management and the board can demonstrate to regulators that they are determined to ensure risk ratings and, therefore, that the ALLL and criticized and classified reporting is accurate.

The annual review procedures should include the following:

  • Detail of the relationship being reviewed including borrower, guarantors, SBA or other guarantees, and note numbers included.
  • Update of all borrower/co-borrower financial information used in the original approval or the latest renewal which would include spreads, debt coverage calculations, loan-to-value calculations, borrowing base analysis, etc.
  • Update of all guarantor financial information including a new complete and signed personal financial statement, most recent tax returns and, for individuals, an updated credit report.
  • A statement of how the account has been handled since the previous annual review (or approval) including any delinquency of payment, financial information, or supporting information such as insurance, borrowing base reporting, etc.
  • In most cases, site visits by the loan officer or relationship manager or other representative of the company should have occurred since the previous annual review or approval. For CRE loans, the documentation of the visit should include perceptions by the representative of the condition of the property, occupancy trends, whether or not any deferred maintenance was noted, and if there were any changes in the neighborhood. For all credits, the representative should also use this visit to become updated on any material changes in the customer base, management, operating personnel, market conditions, condition of equipment or other fixed assets, and any other information that would help to understand the customer.
  • An update of any approval conditions and whether the borrower is maintaining those conditions, including any promises of deposit accounts, financial reporting, property improvements, and compliance with any financial or other covenants.
  • A confirmation that the existing risk rating is accurate or recommendations to change the risk rating, up or down, and the factors that the change is based on.

The financial institution that is covering 50% of its commercial portfolio with robust and timely annual reviews every year should provide executive management and the board with sufficient information to understand the level and direction of credit risk and whether these are in accordance with the desired risk appetite.

For more information on this article or on how Young & Associates, Inc. can assist your institution in this area, please contact Dave Reno, Director of Lending and Business Development, at 330.422.3455 or dreno@younginc.com.

ADA Website Compliance, 5 Key Tips

Written by admin on . Posted in Information Technology, Management & Planning.

By: Mike Lehr, Human Resources and Sales Consultant

Banks must make their websites accessible to individuals with disabilities. That is how federal courts have interpreted the Americans with Disabilities Act (ADA). We have found five key tips go a long way to doing that. Ironically, software scans measuring accessibility don’t do this successfully.

That’s a key, key lesson: do not rely on scanning software to determine whether your site is accessible. Again, do not rely on this software for determining accessibility. In our audits and discussions with attorneys who have defended clients in lawsuits, these results are almost useless. What holds up best is the testimony and tests of sight-impaired users (SIUs) who have used the website. Nothing compares to observing a SIU running through a site. That’s because the WCAG 2.1 and Section 508 guidelines – used as the basis for compliance – have many interpretive elements to them. Yes, some we can quantify and code. About half we can’t. Images make the simplest examples. Scans state whether an alt-text exists. They can’t tell though whether the alt-text is necessary or even useful.

This doesn’t mean scans don’t help. They do. They look at the entire site. A human audit is just that, an audit, meaning it looks at a sample. Scans give one input to developing the site’s audit plan.

The Five Tips

We can summarize the five tips that go a long way to ensuring a site’s accessibility as easy navigation, useful alt-tags, and proper coding practices. The tips focus on SIUs rather than other disabilities because not seeing the site – or seeing it well – is the most difficult challenge to overcome even with good hardware.

1. Navigation Menu – Only One

Websites have many ways to navigate them. In addition to the traditional horizontal menu, mobile menus (hamburger menus) also exist. Sites also employ vertical menus on the left and right sides of the page. They also use fly-in menus that come in on certain pages. The tip refers to silencing all but the most comprehensive or dominant menu.

That means the site should be coded to do this when it detects a screen reader (SRs  ̶  software that allows a SIU to read a site). It should be the most comprehensive and dominant menu. Remember, SIUs can’t see the screen well. They only hear it. Most times they won’t even know how big the window is on the screen.

Yet, SIUs often program SRs to prioritize links. That means SRs will read all menus. For the SIU, that becomes confusing as to which link to click. They hear too many duplicates. Imagine now going to a site where you see double of everything.

2. Alt-tags as Signposts

As mentioned above, SRs often prioritize links. That includes non-menu links such as those imbedded in text, images, and other elements. Links tend to take users to one of four places: another page, another place on the same page, another site, or a file such as a PDF. In doing so, one of two things happen: the user remains in the same window or opens a new one.

This tip refers to using alt-tags as signposts. Two sides of this exist. The first involves telling SIUs where they are going. Otherwise, they primarily think they go to another page. The site needs to tell them even if the image’s caption or surrounding text clearly states this. That’s because SIUs can program the SR to read only the links on a page, meaning the SR won’t read context clues.

The other side of this involves making each link distinct. For instance, “click here” often appears after descriptive text such as, “To go to our checking account page click here.” It tells SIUs nothing when they program the SR to read links only. This compounds if many links say “click here.” So, choose to make the whole phrase a link or add more description to the alt-tag.

3. Alt-tags as Additional Descriptors

Many misread the guidelines when they come to alt-tags for non-links such as images. They think it says – and scanning software reinforces this – that alt-tags can’t be blank. So, sites duplicate the caption in the alt-tag or add text to a purely aesthetic design element such as a color block, shape, or filler that communicates nothing.

Imagine a great, beautiful well-designed home. However, when you enter there’s clutter everywhere. You have to move things around. You even trip over some. This is “death by a thousand cuts.” Sites do the same to SIUs when they have duplicate, nonsensical, and useless alt-tags.

In such cases, code the alt-tag with the left double quotes followed by the right double quotes (“”). This tells the SR to skip the alt-tag and tells the scanning software an alt-tag exists (so it won’t flag it as an issue).

4. H-tags and TITLE Attributes

SRs assume sites use generally accepted coding practices. That means SRs will have problems with sites that don’t. Two of the more common ones that sites overlook are the h-tag and the TITLE attribute. The first identifies headers. The second identifies the page.

Sites can prioritize headers. Headers using an h1 tag is the most important. H2 tags are second, h3 third and so on. Most web managers know these headers as ways to change the look of a header. Their use can automatically enlarge, bold, italicize, color, or underline headers.

While h-tags allow designers to quickly add design enhancements to headers, they also serve to prioritize content. In this role, they help SIUs much. Just as SIUs can program SRs to read only the links on a page, they can also have them read just the headers. Some even allow them to program what level header to read, such as “read h1 – h3 headers” only. This means that headers must accurately reflect the relative importance of the website page’s content.

Unfortunately, content managers often only look at h-tags as design elements. So, rather than code a header using an h-tag, it might be quicker and easier just to bold and color text. After all, it will just look the same. However, this just relegates a header to common text. SRs will miss it.

TITLE attributes serve no real purpose for non-SIUs. Since they appear at the top of a page’s code, they can serve to further describe the page and reassure SIUs that they arrived on the page they wanted. Again, many sites just throw something similar to the page’s visible title in this or something abbreviated. More description often helps SIUs.

5. Help Desk Phone Number

Companies increasingly employ more automated forms of problem resolution. So, they aren’t likely to list a phone number prominently on their sites. Yet, such a number can go a long way to helping SIUs work through a site. Including the phone number near the top in the page’s coding will make it invisible to non-SIUs but accessible to SIUs with their SRs.

For instance, the site could include the number (along with times of availability) in the alt-text of the company’s logo in the upper left which often includes a link to the home page. Sites often include this number before or after input elements such as account logins.

Of course, this does necessitate that the bank supports the number. That might mean changing voicemail prompts and other protocols if the number has other uses. It also means training staff to handle such calls with sensitivity and patience.

Going a Long Way

Except for the first tip regarding menus, a reasonably experienced website content manager can perform these tasks. Even then, with less than an hour’s training, others can learn. Time and discipline remain the real challenge. It can begin though with ensuring that any new content incorporates these tips.

As for policy decisions, we recommend that banks purchase scanning and screen reading software. They make a world of difference. Also, and finally, we encourage banks to contact their local society for the sight impaired and ask for their help. Most members already have SRs. See if you can observe them using your site. It’s not only good community outreach, but I guarantee you will find it an eye-opening experience. We did.

For more information on this article and how Young & Associates can assist your bank in this area, contact Dave Reno, Director – Lending and Business Development at dreno@younginc.com and 330.422.3445.

SAFE Act a Decade On

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

By: William J. Showalter, CRCM, CRP, Senior Consultant

We have been dealing with the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) since 2010, and yet questions surface or confusion still exists over SAFE Act requirements.

“A loan clerk quotes loan rates from a non-public rate schedule, along with payment amounts for inquiring consumers. Should she be registered?” (Maybe, she is performing a function of a mortgage loan originator, MLO.)

“Our head of lending is our SAFE Act Officer. He also handles some mortgage loans, with his name on loan documents. However, his background is in commercial lending and he has never been registered with the NMLSR. Do we have a problem?” (Yes, if he is involved in more than five mortgage loans per year, he must be registered.)

“How often do we have to get criminal background checks for our MLOs? How about when their fingerprints expire?” (Criminal background checks are required only on initial registration. The fingerprint expiration date is only relevant for existing MLOs who are coming into the bank as new employees. No updating of fingerprints for ongoing MLOs is required.)

These queries reveal that confusion still exists over what the requirements are and how they impact banks and thrifts.

A Little Background

Congress enacted the SAFE Act in July 2008 to require states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators, and to provide for the establishment of a nationwide mortgage licensing system and registry for the residential mortgage industry.

The SAFE Act required all states to provide for a licensing and registration regime for mortgage loan originators who are not employed by federal agency-regulated institutions within one year of enactment (or two years for states whose legislatures meet biennially).

In addition, the SAFE Act required the federal banking agencies, through the Federal Financial Institutions Examination Council (FFIEC), and the Farm Credit Administration (FCA) to develop and maintain a system for registering mortgage loan originators employed by agency-regulated institutions.

The Dodd-Frank Act moved responsibility for the SAFE Act rules to the Consumer Financial Protection Bureau (CFPB), which rolled these rules into its Regulation G (12 CFR 1007).

Licensing vs. Registration

Most of the confusion at the outset seemed to center on the issue of licensing versus registration of mortgage loan originators (MLOs). The issue is really deceptively simple.

  • MLOs that work for federally supervised banks, thrifts, and credit unions (as well as FCA lenders) must register with the national registry (NMLSR).
  • MLOs employed by other mortgage lenders (mortgage companies, etc.) must navigate the state licensing and registry system, a much more time consuming, expensive, and burdensome process which also carries a continuing education requirement.

Coverage

A “mortgage loan originator” is an individual who both takes residential mortgage loan applications and offers or negotiates terms of a residential mortgage loan for compensation or gain.

The term “mortgage loan originator” does not include individuals that perform purely “administrative or clerical tasks” (the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the mortgage industry) and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan. Also excluded are individuals that perform only real estate brokerage activities and are duly licensed, individuals or entities solely involved in extensions of credit related to timeshare plans, employees engaged in loan modifications or assumptions, and employees engaged in mortgage loan servicing.

“Compensation or gain” includes salaries, commissions, other incentives, or any combination of these types of payments.

MLO Registration

An MLO must be federally registered if the individual is an employee of a depository institution, an employee of any subsidiary owned and controlled by a depository institution and regulated by a federal banking agency, or an employee of an institution regulated by the FCA.

The final rule, as required by the SAFE Act, prohibits an individual who is an employee of an agency-regulated institution from engaging in the business of a loan originator without registering as a loan originator with the national registry, maintaining that registration annually, and obtaining a unique identifier through the registry. Employer financial institutions must require adherence to this rule by their employee MLOs.

MLOs may submit their registration information individually or their employer institution may do it for them (by a non-MLO employee). The decision of which approach to take should be made by management to ensure consistency within the institution, especially since there is prescribed institution information that also must be submitted to the registry.

This MLO information must include financial services-related employment history for the 10 years before the date of registration or renewal, including the date the employee became an employee of the bank – not just the time they have worked for their current employer.

MLOs and their employers need to remember that registrations have to be renewed annually for as long as an individual operates as an MLO. The renewal period opens on November 1 and ends on December 31 each year. If an MLO or bank registration lapses, it may be reinstated during a reinstatement period that opens on January 2 and closes on February 28 each year.

Other Requirements

Bank and thrift managers also should remember that there are specific requirements in this rule for the institution to have policies and procedures to implement SAFE Act requirements, as well as regarding the use of a unique identifier (NMLS number) by MLOs.

At a minimum, the bank’s SAFE Act policies and procedures must:

  • Establish a process for identifying which employees have to be registered MLOs
  • Require that all employees who are MLOs are informed of the SAFE Act registration requirements and be instructed on how to comply with those requirements and procedures
  • Establish procedures to comply with the unique identifier requirements
  • Establish reasonable procedures for confirming the adequacy and accuracy of employee registrations, including updates and renewals, by comparisons with its own records
  • Establish reasonable procedures and tracking systems for monitoring compliance with registration and renewal requirements and procedures
  • Provide for independent testing for compliance with this part to be conducted at least annually by covered financial institution personnel or by an outside party
  • Provide for appropriate action in the case of any employee who fails to comply with SAFE Act registration requirements or the bank’s related policies and procedures, including prohibiting such employees from acting as MLOs or other appropriate disciplinary action
  • Establish a process for reviewing SAFE Act employee criminal history background reports, taking appropriate action consistent with applicable federal law, and maintaining records of these reports and actions taken with respect to applicable employees, and
  • Establish procedures designed to ensure that any third party with which the bank has arrangements related to mortgage loan origination has policies and procedures to comply with the SAFE Act, including appropriate licensing and/or registration of individuals acting as MLOs

The bank or thrift also must make the unique identifiers (NMLS numbers) of its registered MLOs available to consumers “in a manner and method practicable to the institution.” The bank has latitude in implementing this requirement. It may choose to make the identifiers available in one or more of the following ways:

  • Directing consumers to a listing of registered MLOs and their unique identifiers on its website
  • Posting this information prominently in a publicly accessible place, such as a branch office lobby or lending office reception area, and/or
  • Establishing a process to ensure that bank personnel provide the unique identifier of a registered MLO to consumers who request it from employees other than the MLO

In addition, a registered MLO must provide his or her unique identifier to a consumer:

  • Upon request
  • Before acting as a mortgage loan originator, and
  • Through the MLO’s initial written communication with a consumer, if any, whether on paper or electronically (often by incorporating it into the signature information for standard letter and e-mail formats)

Banks, thrifts, and their registered MLOs often also make their NMLS numbers available in other ways – such as including them in advertising or on business cards.

As with any compliance rule, banks and thrifts need to make sure that they have systems in place to ensure compliance with SAFE Act requirements, including appropriate training for employees involved in the mortgage origination process.

For information on how Young & Associates can assist your bank with the SAFE Act requirements, contact Dave Reno at 330.422.3455 and dreno@younginc.com.

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