Video: How to justify and support your qualitative factors – Part III

Banks and credit unions often face challenges when justifying and documenting qualitative and environmental factors in the allowance calculation. According to the 2006 Interagency Policy Statement, there are nine qualitative factors that can be used to justify your FAS 5 loss rates. As a part of a video series, the nine factors were divided into two main categories: internal and external. In part I and II, three external and three internal factors were discussed. In this final part, the remaining internal factors that are less frequently used will be discussed.

From the video

In this video, I will focus on three factors that are more internally focused:

1. Changes in lending policies and procedures
2. Changes in the experience, depth and ability of lending management
3. Changes in the quality of the organization’s loan review system

The common thread between these three adjustments is that though they can be used as appropriate, they are not going to be things you will adjusting every time you perform a calculation. Maybe you have a change in your charge-off and recovery policies, or changes in lending policies will warrant a change but it won’t change period over period. It is the same thing with changes in the experience of lending management. If you hire a new chief credit officer or new talent in the lending department, you could make adjustments but it won’t change from period to period. This also holds true for the changes in the quality of the organization’s loan review system. For example, if you bring in an external party for your loan review, it might require you to make adjustments to your qualitative factors but it won’t be changed quarter over quarter.

Banks and credit unions use Sageworks ALLL, the industry-leading ALLL solution, to help with their qualitative risk factor adjustments.

By Tim McPeak, senior risk management consultant at Sageworks