NCUA s MBL Change: The Importance of Credit Analysis. Wednesday, April 6, :00 pm - 3:00 pm (ET)

Transcription

1 NCUA s MBL Change: The Importance of Credit Analysis Wednesday, April 6, :00 pm - 3:00 pm (ET)

2 Presenters Elizabeth LaBerge, Regulatory Compliance Counsel, NAFCU Daniel Jackson, Product Manager, Risk Origination & Compliance, Wolters Kluwer Teresa Freborg, Director of Member Business Services, Northwest Community Credit Union

3 Elizabeth LaBerge - NAFCU Update on MBL Rule

4 MBL Final Rule Important Dates February 18, 2016 Board Issues the MBL Final Rule March 14, 2016 MBL Final Rule is published in Federal Register May 13, 2016 Provision removing the strict personal guarantee requirement is effective, 60 days after publication January 1, 2017 Remaining provisions of the final rule are effective

5 Final Rule List of Waivers No Longer Required Aggregate C&D Loan Limit Minimum Borrower s Equity for C&D Loans LTV Requirement Personal Guarantee Requirement Maximum Unsecured MBL to One Member or Group of Associated Members Maximum Aggregate Unsecured MBL Loan Limit Maximum Aggregate Net MBL to One Member or Group of Associated Members

6 Final Rule Key Changes from the Current Rule Current rule: Sets prescriptive limitations on the member business loans that can be made, including LTV requirements, guarantee requirements, and multiple concentration limitations. New rule: Defines commercial loans separately from member business loans, separating underwriting concerns from the statutory cap. Commercial Loans: Establishing commercial lending policies and program responsibilities for making commercial loans which are risk-weighted for RBC purposes. Member Business Loans: Rule discusses the statutory limit on member business loans as defined by Congress.

7 Final Rule Key Changes from the Current Rule Provided exemption from separate policy and personnel requirements for smaller credit unions with limited commercial loan exposures and activities Modified the associated borrower definition to narrow its scope and reconcile definition with other banking regulators Removed prescriptive LTV limitations Removed strict requirement for personal guarantees Replaced the two-year experience requirement with more flexible governance and experience standards Clarified policy requirements, LTV calculations, and C&D collateral value determination and disbursement process

8 Final Rule Key Changes from the Current Rule Established policy requirements on the use of a credit risk rating system and commercial lending risk management processes Removed prescribed portfolio concentration limits Allowed the single obligor limit to go up to 25% of net worth, if the amount above 15% of net worth is collateralized by readily marketable collateral Clarified non-member business loan participations do not count toward the statutory cap no waiver needed Reflects statutory wording of MBL cap as 1.75 times net worth

9 Final Rule Expected Supervisory Guidance Critical components of commercial loan policies Credit risk rating systems Discussion of the associated borrower definition Collateral valuation and management Establishment of maximum LTV ratios for various collateral types Use of personal guarantees Appropriate reporting to management and the board Guidance expected no later than September, 2016.

10 Final Rule Change in Approach Transitioning to a risk-based approach, rather than a prescriptive approach. Examinations will focuses on a portfolio-wide analysis, rather than a technical analysis of individual loans. Old Rule Max LTV ratio of 80% without insurance Personal liability and guarantee required Two years direct experience in commercial lending to make loans New Rule Collateral commensurate with associated risk Not required where mitigating factors offset the risk Qualified management and staff with appropriate experience in commercial lending

11 Dan Jackson Wolters Kluwer Credit Analysis and Its Importance for Member Business Lending

12 Why Does Credit Analysis Become so Important? Business and Commercial Real Estate Loans Require vigorous analysis to: Understand the Financial Capacity of the business or property to pay its obligations Make sound credit decisions Monitor Risk Exposure and Performance at the loan and portfolio level through life of loan Ensure that Underwriting and Due Diligence Standards are followed and consistently applied

13 Foundational Elements of Credit Analysis Spreading Financial Statements and Tax Returns Trend Analysis, CASH Flow Analysis and Ratios Analysis of Historical and Pro-forma performance Evaluate, Stress and Monitor Cash Flow Quality Identify areas of strength or weakness using Ratio Analysis Compare to peer group by industry or property type Assess the Business Risks or Market Risks Apply tools for transaction analysis and loan structure Evaluate Collateral Set Effective levels for Loan Covenants Writing a Clear and Concise Credit Analysis Report

14 What might the changes mean for Active Member Business Lenders? Do s Maintain Solid Underwriting and Monitoring Standards Document and Obtain Board Approval for any Policy Changes Make sure policy changes are fully vetted Track the impact of any changes for several reporting periods Increase Scrutiny where Risks are more prevalent, such as Don'ts Participations Unsecured Borrowings Change lending procedures or standards without documenting Board Approval Make more changes in lending than your infrastructure can support

15 New or Aspiring Member Business Lenders Consult with other Credit Unions and CUSO s that specialize in member business lending Develop a detailed Member Business Lending Strategic Plan for your organization Update your Loan Policy with policies, procedures and limits Determine what origination and servicing activities will be done in-house and/or out-sourced Appoint solid, experienced commercial lenders and credit officers to key risk positions Having the Right People for MBL Departments is the key

16 Why Software is Important and How it Can Help? Standardize your Collection, Analysis and Storage of Credit Data Enforces the Fundamentals to ensure accurate underwriting and high quality loan origination Eliminates or minimizes data entry errors Provides a comprehensive financial view of each member Most systems will allow for imbedding your credit union s policies into the risk management framework Easily Build Financial Projections, Scenario Analysis and Stress Tests Streamline the approval process and avoid data loss and redundancy

17 Teresa Freborg Northwest Community Credit Union A Credit Union Perspective

18 Background on Northwest Community Credit Union s MBL Program Located in Eugene, Oregon $1 Billion in Assets 102,336 Members MBL program began approximately 12 years ago MBL portfolio is approx. $93Mil centered in commercial real estate Staff of 9, including calling officers, analysts and support staff

19 Credit Analysis Challenges Qualified analysts and underwriters Harder to find-most come from banks Bank vs Credit Union- analysts may have a cultural adjustment Consistency Picking a cash flow calculation- multiple options Consistent risk rating criteria Speed Quickly approve or decline Approvals require higher authority levels -timing may be difficult When is it MBL and when is it consumer business? Over or under $50,000 aggregate? This is our biggest challenge

20 The Role of Software for Credit Analysis It is more than just the financial statement We customized some of the templates to reflect our requirements We created custom reports to standardize reviews We know exactly what we have for a member Total exposure-all loans and deposits, not just MBL What documentation we have, what we need, when we need it We utilize it for tracking our CRE portfolio By type of property and location, for exposure and site inspections Publication Looks professional, fast and easy to publish

21 Recommendations What things should Credit Unions be thinking about or considering when looking for a software solution. Bank-trained staff uses analysis software, Examiners prefer it MUST be game proof formulas locked cannot change the to make a deal better Ease of Use Quick to learn, easy to enter information User Rights must be able to reject or allow different access Flexible allows you to add your own formulas or information Data mine allows you to look at segments of your portfolio, instead of just the individual business property Integrated ties the statements to the ticklers, tracks the covenants, allows flexibility so nothing is missed. One stop shop for all you need to know about a member and loan Support Quality support for your team

22 Questions?

23 Wolters Kluwer A NAFCU Services Preferred Partner for Consumer and Member Business Lending & Deposit Solutions and Services. CASH Suite a comprehensive solution that enables your institution to efficiently and effectively manage opportunities at every step of the commercial loan process. NAFCU Member-only Benefits - All NAFCU members receive 1st year license fee discounts of 10% on consumer and member business lending and deposit electronic solutions. Visit or contact Matt Haupert at matt.haupert@wolterskluwer.com for more information.

24 Thank You!