Consistency in risk ratings is critical for commercial lenders. There are plenty of best practices to follow when choosing your risk rating factors to ensure an effective and consistent risk rating process. Risk rating becomes a craft: the more you do it, the better you become at it. When you’re going in and rating a loan, you usually have a gut feeling of what your rating is going to come out at, based on your experience. However, every once in a while you complete the scorecard and see a score you didn’t expect – what do you do you next?
Check your inputs
Alison Trapp, Abrigo Director of Client Education, suggests that double-checking your inputs should be your first reaction – even if it is probably an obvious answer. From accidentally pressing the wrong key to clicking the wrong dropdown on a menu, a small miscue could make a big difference in your report. Look out for those quick, simple solutions first whenever you get an unexpected score.
Downgrade on expectations, upgrade for performance
Occasionally, you may have a one-off reason that you’re differing. This difference is usually because your analyst has information on your borrower that has not yet made its way into the financials or other scorecard inputs yet. For example, if an analyst knows that a borrower just lost their biggest customer, they are going to take that into consideration immediately, rather than waiting for it to flow through the financials before they downgrade that credit. This situation is consistent with Trapp’s saying, “downgrade on expectations, upgrade on performance.” In this case, there’s no bigger issue at hand and it’s simply a one off situation. “You may have more than one ‘one-off,’ but there’s nothing broken in the overall system,” she says. “If you do run into this type of situation, document why you’re assigning a final rating that differs from the scorecard and move on.”