Regulators expect that lending departments at credit unions not only assign risk ratings accurately and timely but also that they use them throughout risk management processes. In the Commercial Risk Rating Considerations eBook, Abrigo Director of Client Education Alison Trapp outlines five areas in which credit unions should consider using risk rating.
1. New Originations
“Risk rating is a means for ensuring an institution is originating and renewing loans in a safe and sound manner,” said Trapp. “For that reason, the underwriting process should include an assessment of risk rating early and not leave it for a “check the box” exercise right before approval, or worse, closing.”
Risk rating may also govern commitment and hold levels as well as when a guarantor is required or what structures are available to a given member. Some members have weaker cash flow that would result in an unacceptable rating unless there are structural enhancements that reduce that risk.
2. Loan Pricing
Intuitively, risk managers understand that higher risk loans should have higher fees or interest or a shorter tenure. Explicitly tying loan pricing to risk rating allows credit unions to implement these structural elements more consistently. It also allows credit unions to evaluate any exceptions to the pricing policy within a framework. In certain cases, they may deem it advantageous to stray from its own policy for a bigger purpose; having the policy in the first place allows credit union management to understand the cost of doing so.