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4 Risk rating applications for credit unions         

December 5, 2017
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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.


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3. Resource Management

Risk rating can be a powerful guide for managing resources. A starting point is to align experience levels with accounts from different risk grades. When the portfolio is managed with risk rating, the credit union can use data to understand how changes to the portfolio will affect the resources required to manage the assets effectively. For example, if the credit union is planning to acquire a portfolio of loans and it knows A) the risk rating distribution of those assets and B) the amount of a full-time resource that each risk grade requires to manage to its standards, it can estimate the additional resources it will need.

4. Allowance for Loan & Lease Losses (ALLL)

There is a logical correlation between risk rating and ALLL as risk rating changes can be a yardstick for measuring reserve provisions. Embedding risk rating in the ALLL process explicitly systematizes what institutions would be doing instinctively—aligning reserve levels with risk levels.

Aligning processes to risk rating in a credit union can impact the institution’s financial performance and human resource efficiency. 

About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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