How to establish policies for a sound MBL program
After developing an MBL strategy, the next step is to define lending policies to ensure the success of the strategy. This will help to satisfy regulatory requirements and alleviate unnecessary pressure on employees by reducing subjectivity in the loan decisioning process.
When developing institution-specific policies, be sure to pay careful attention to the following policy areas:
• Cash flow analysis
• Onsite inspection, appraisals and appraisal reviews
• Geographic risks
• Limits and restrictions
• Corporate entity, licensing and signing authority verification
• Credit risk rating system
• Audit review and control
Cash Flow Analysis
To ensure a consistent and accurate cash flow analysis, focus on creating policies and procedures to address how cash flow will be used in determining the borrower’s debt service coverage ratio and in approving credits. A global cash flow is necessary for complex borrowers, so be sure to address the cases in which this is encouraged as well as instructions on how to perform the analysis properly.
On-site inspections, appraisals and appraisal reviews
It is also important to ensure knowledge of the project, as well as well supported appraisal valuations are used for making credit decisions. The policy should also make certain that appraisal reviews are performed appropriately and consistently and to determine if the final appraised value is adequately supported.
To mitigate risk, include create a policy that restricts loans outside the market area of the credit union, as examiners will look more critically at these loans.
Limits & restrictions
Limits and restrictions should be well thought out to manage commercial lending risks, including overall MBL portfolio limits, loan type limits, geographic restrictions, debt service coverage ratio, loan-to-value and other appropriate ratio limits.
Corporate entity, licensing and signing authority verification
Verify the good standing and proper licensing of the entity and the signing authority of corporate officials representing the entity.
Credit risk rating system
The system should comply with WAC and FAS guidance, and must be clear to credit union employees. The policy should include when risk ratings should be updated and how the ratings will be used to track overall portfolio risk. In addition, establish risk rating reporting requirements to ensure that management and the Board are informed.
Audit review and control
Establishing internal and external audits can help avoid risks. Most credit unions with significant MBL activity can benefit from third-party reviews. Additionally, credit unions with smaller MBL programs could also use third party reviews to validate internal audits. Outside reviewers will need sufficient time to analyze all of the components for meaningful and actionable results.
The Board of Directors plays a key role in creating policies to ensure a sound MBL program. They are responsible for approving policies, oversight and annual reviews of policies. Through Board involvement, the credit union can address changes in lending regulation or adjust institution-specific strategies.
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