Introduction to Member Business Lending. Jamie Reznick, Senior Manager Aran Loftus, Manager

Transcription

1 Introduction to Member Business Lending Jamie Reznick, Senior Manager Aran Loftus, Manager

2 Presentation Objectives Defining member business lending Strategic considerations Policies and controls Reporting and monitoring Common audit and exam findings 2

3 Defining Member Business Lending What is member business lending? In short, these are loans to businesses! Proceeds from the loan are used to purchase business related assets or for investment purposes Common member business loans are for: Purchase of commercial real estate for use by the business or for investment purposes Construction Purchase of equipment for use by the business Purchase of residential rental property Lines of credit to fund short term cash flow needs 3

4 Defining Member Business Lending Common definitions: CRE Commercial Real Estate C&I Commercial and Industrial Owner occupied the purchaser occupies the property and uses it for their business. Ex: Auto repair shop Non owner occupied the owner rents to third parties. Ex: Shopping center SBA Loans loans guaranteed by the Small Business Administration and subject to the specific requirements as defined by the SBA. Revolving lines of credit loans used for short term cash flow needs and require periodic repayment. Ex. Credit cards 4

5 Defining Member Business Lending Common definitions (continued): Participations and loan pools Loans funded with other credit unions. Participation sold the credit union sells a portion of the loan to another credit union Participation purchased the credit union purchases a portion of a loan from another credit union Loan pools A grouping of similar loans purchased from, or sold to, another credit union. Commonly used for auto loans. TAKE AWAY If your Credit Union is involved in these activities or considering these transactions, we recommend having a conversation with your auditor and management regarding accounting requirements. 5

6 Defining Member Business Lending Who is doing it? Over 2,000 credit unions participate in business lending. That s over 30% of Credit Unions! In 2014, they granted or purchased over 100,000 loans Accounts for over $53 billion of loans at 12/31/14 CUNA compiled growth rates reflect 12.4% growth rate in 2014 compared to 2013 and reflect approximately 7.4% of overall loan portfolios (U.S. Credit Union Profile Year End 2014, CUNA Economics & Statistics) 6

7 Strategic Considerations Why are Credit Unions lending to businesses? Members demand it! Avenue for growth Increase yield 5% for MBLs versus 1.99% for autos Positive trends Regulatory acceptance Delinquencies have declined $423 million in 2014 compared to $686 million in 2013 Charge offs have declined $152 million in 2014 compared to $206 million in

8 Strategic Considerations Source: SNL Datasource 8

9 Strategic Considerations What should we consider in our strategy? Who do we want to lend to? How are we best able to serve our members? Do we have the right management team? What happens when a loan goes bad? What do our examiners think? What is our limit? Regulatory limit is the lesser of 1.75% of net worth or 12.25% of total assets Subject to being well capitalized March 2015 bill introduced to Congress to increase to 27.5% 9

10 Strategic Considerations What should we consider in our strategy? Who do we want to lend to? How are we best able to serve our members? Do we have the right management team? What happens when a loan goes bad? What do our examiners think? What is our limit? Regulatory limit is the lesser of 1.75% of net worth or 12.25% of total assets Subject to being well capitalized March 2015 bill introduced to Congress to increase to 27.5% 10

11 Policies and Controls Now that we decided to lend, what s next? Policies and controls! 11

12 Policies and Controls Policies Drafted by management and approved by the Board Should address: Basic elements of strategy including desirable loan types Underwriting guidelines by loan type Loan approval guidelines Concentration limits Loan workout scenarios, modifications, and impairments Consideration of risk ratings and reference to related allowance policy Collateral review and monitoring including appraiser qualifications 12

13 Policies and Controls Controls Documented by management or internal auditor Should address: Approval controls Loan funding controls Loan boarding controls Collateral File maintenance review including index rate changes Impairment reviews and delinquent loan monitoring Periodic credit review approval and administration Loan approval exceptions 13

14 Reporting and Monitoring We have all this data now what? Common monitoring reports: Loans by risk rating Loans by type and collateral Loans by branch and/or officer Delinquency reporting Charge off and recover reporting Watch list this is a key report! 14

15 Reporting and Monitoring What should we be reviewing? Management the aforementioned reports Board Totals, new loan originations, charge offs, delinquency, exceptions, a summarized watch report, 5300 call report and audited financial statements Supervisory Committee audited financials, control exceptions, internal auditor reports 15

16 Reporting and Monitoring What role does the internal auditor play? Periodic audits of loan terms, file completeness and compliance Periodic audits of key member business lending controls Report audit findings to the supervisory committee Coordinate independent loan file review engagement Coordinate independent allowance for loan losses validation 16

17 Common Audit and Exam Findings Overarching: Lack of a clearly defined strategy Lack of comprehensive governing policies Management team not qualified Controls: Loan boarding controls deficient or do not exist Lack of file maintenance controls Impairments are not recognized in a timely manner Risk ratings are not accurately input to the allowance for loan losses Physical security controls 17

18 Common Audit and Exam Findings Additional findings: Policy exceptions not approved Appraisal reviews not completed or not subject to segregation of duties Lack of covenant monitoring (tickler systems) Adding lines of business or loan types without accompanying policy Purchasing loans outside the credit union s operating region Monitoring a borrower s global financial picture Lack of well defined workout strategies 18

19 Common Audit and Exam Findings Implications of findings: Regulatory documents of resolution and higher CAMELS ratings Inability to fund new member business loans Excessive risk levels in the portfolio Reputational and economic costs due to errors in the funding and servicing process 19

20 Presentation Recap Defining member business lending Strategic considerations Policies and controls Reporting and monitoring Common audit and exam findings Thank you! 20