Reviewing Loan Portfolio Risk Can Save Time, Money for Credit Unions

Managing loan portfolios has become increasingly complex in recent years, in part because of the growing number of bankruptcies. According to CUNA, loans subject to bankruptcies have increased 15 % and net charge-offs have risen 32% since 1996. These trends make it imperative that credit unions not only remain consistently vigilant concerning the details of their portfolios, but also have an adequate risk management program in place. Such programs come in many varieties, including collateral protection insurance (CPI), and can be tailored to meet the specific needs of the organization. Five performance categories exist in which a credit union should judge a provider’s product in order to determine its overall worthiness: accountability; risk management; disclosure and compliance; loan origination communication processes; and the ability to leverage technology. When it comes to accountability, trust is key. A credit union needs to evaluate the accuracy of its provider’s CPI quality control measures and reporting so that certain relationships with members will not be damaged. Maintaining accountability involves asking questions of the provider. What systems are in place to ensure that false placements do not occur? What management tools and reporting mechanisms are available that would allow the credit union to monitor tracking and service processes? How quickly are documents processed and phone calls returned? What procedures does the provider have in place to resolve potential disputes? Essentially, what tools does the provider have in place to demonstrate the value of its product and its service? Additionally, an institution should be sure that the provider is willing to fully disclose the financials about its collateral protection program on a routine basis so that the company can adequately evaluate the cost-effectiveness of the program. Risk management is the basic idea behind CPI, but some programs address different types of risk. How a program mitigates loan exposure through a collateral tracking program should be unique to your institution’s portfolio. It should include considerations for top tier credit risks, indirect lending and other portfolio demographics. Coverage, tracking and member service should be customized to identify the unique aspects of a credit union’s lending program. If warranted, there could be different coverage and tracking processes for each segment of your portfolio. In determining whether a program truly is oriented toward loan risk management, credit union representatives should examine how well the program is tailored to fit their institution’s specific needs. Disclosure and compliance procedures are of utmost importance because a number of class-action lawsuits over forced-placed insurance have been filed in the past. Among the more notable cases are the suits that involved Mellon Bank in Pennsylvania and Trustmark National Bank in Mississippi. Although the industry as a whole has implemented new coverage and service designs to minimize potential legal exposures, many credit unions still have not adequately addressed compliance issues regarding disclosure. For instance, if commission or other fees are collected without full disclosure, the institution may be liable. Often, institutions neither disclose to their members at loan origination the nature of their risk management policies nor discuss what could happen in the event the member does not maintain adequate insurance coverage. It is essential that you make sure your provider has proactive procedures in place to regularly review litigious trends and federal and state regulations. Another area that deserves close attention from credit unions is communication during the loan origination process. Institutions should evaluate their origination procedures to ensure that their loan staffs are properly communicating their credit unions’ insurance requirements. Many credit unions have stopped using paper “Agreement to Provide Insurance” (ATP) forms because of new technology and the belief that verbiage contained within the Note and Security Agreement made this additional form redundant. Elimination of ATP forms can result in less consistent communication about a credit union’s insurance requirements. Without a strong verbal and written disclosure process concerning these matters, a credit union could realize a higher number of false placements of CPI coverage and more member complaints. The tremendous advances in computer technology have created numerous opportunities for CPI providers to improve efficiency and lower costs for their customers. Electronic data interchange, optical character recognition, paperless work flow, Internet verifications and telephony all play a critical role in the accuracy of determining who is insured and who is not. Determine whether your provider is using technology to better serve your members, lower costs and offer more accountability. Credit unions should review their risk management and collateral protection programs at least quarterly. Assessing CPI programs based upon accountability, risk management, disclosure and compliance, loan origination communication processes and the ability to leverage technology can pay off immensely in the amount of time and money saved. The potential benefits include a reduction in workload and cost; a reduction in member complaints; maximizing coverage without creating collection challenges; improving the accuracy of identifying the uninsured risk pool and minimizing false placement; and minimizing legal exposure. Ultimately, there is very little difference between one collateral protection policy and another concerning available coverages and endorsements. Consequently, credit unions should be more focused on the services provided and, to a lesser extent, the CPI coverage parameters offered. Credit unions should recognize that although they are remitting premiums for the coverage, the provider is simply the custodian of these funds and the credit unions should play a major role in deciding how the premiums are administered. Be proactive in determining how and when service is delivered and how much emphasis is placed on each aspect of product delivery, such as claims, insurance verification processes and technology. The business of lending is not risk-free, and a credit union shouldn’t expect its insurance provider to cover 100% of every potential loss or deficiency balance. It is simply too expensive for both credit union and member. The greater the loss covered, the higher the premium rate required and the greater the rate of repossession and potential deficiency. Credit unions should strike a balance between insured and self-insured exposure and a CPI premium rate that does not create collection challenges down the road.