Managing risk in MBL: Best practices and comprehensive strategies for credit risk management
The NCUA passed a new MBL rule, effective January 1st of this year. This is part of larger efforts to expand credit unions’ ability to expand their commercial lending portfolios.
As a recent Sageworks blog post on the new MBL rule explains,“one key aspect of the new rule is the clarified distinction between Commercial Loans and Member Business Loans, and the affirmation that ‘non-member loan participations do not count against the statutory MBL cap’”.
The purpose of the new rule is to give credit unions more flexibility to implement principle-based risk management processes and policies. This means it’s important that credit unions reevaluate their risk management strategies.
As part of a Sageworks’ video series addressing some of the challenges and questions around credit analysis, Garrett Morris, senior risk management consultant at Sageworks, identifies three key risk areas in member business lending: Can the borrower pay, will the borrower pay, and what happens if borrower does not pay? Morris provides solutions to mitigate these risks:
1. To analyze whether the borrower can pay, examine their financial and cash flow position, especially their debt-service coverage ratio (DSCR). Morris says looking at the borrower’s DSCR along with their ability to repay their past debt has become an industry trend. Ensure that the credit union maintains a comprehensive understanding of the borrower’s financial capacity for the duration of the relationship.
2. To predetermine whether the borrower will pay requires an assessment of their character. Take a look at characteristics like the borrower’s management experience or how long they have been in business. Also consider how long they have banked with the institution.
3. Even for trustworthy borrowers, the credit union should make sure they have adequate collateral securing the loan. That collateral should also be accessible and recently appraised.
4. CUNA suggests establishing a formal credit risk rating system to assign a risk rating to each commercial loan in the portfolio. The system should vary depending on the complexity of the commercial loan portfolio.
The new MBL rules enables credit unions to take advantage of expanding opportunities in commercial lending. As credit unions increase their exposure to the unique risks that come with growing the MBL portfolio, it will be increasingly important for credit unions to review credit risk management processes.
To learn more about the MBL and the new rule, check out Sageworks MBL Starter Kit.
