Keeping the Regulators Happy
Some may say that this is an impossibility, but we have some thoughts that will make it easier to comply with the Guidelines on Concentrations in Real Estate Lending (FIL-104-206) [1] and other banking regulations. As qualifying commercial real estate loans exceed 300% of capital, or construction loans exceed 100% of capital, banks become subject to increased regulatory attention to their commercial real estate loan portfolios and are expected to implement heightened risk management practices.
Here are four items that we think will go a long way toward better risk management of the portfolio and may even make your regulators happy.
- STRESS TEST THE PORTFOLIO. Be able to quickly and efficiently stress test the entire portfolio to identify loans that may be weak under the stressed conditions. These loans can then receive closer scrutiny, and might be placed on the watch list if appropriate. Factors to stress would include collateral value, collateral income, loan rate, and cap rates.
- BOARD AND MANAGEMENT REPORTING. The ability to easily provide Management and the Board with comprehensive reports on the current quality of the portfolio and current trends is key. The reports should focus on credit quality issues such as delinquency status, non-performing loans, adversely rated loans, reserve levels, the distribution of loans by loan rating, among other items. Reports should include hard data and a graphic display as well. Management should be able to look at real time reports, and review sets of reports at periodic review meetings.
- SLICE AND DICE THE PORTFOLIO. While it is important to have a standard set of reports that can be produced quickly and efficiently, standard reports will never be able to reflect subtle changes in the portfolio or address all issues. So it is important to be able to easily and quickly create variations of reports that group data as needed with appropriate group totals and averages, sort data in a meaningful manner, and filter portfolio data so that reports focus on sub-sets of loans that are of special importance.
- MAINTAIN CURRENT DATA. One of the more difficult issues is to maintain current information for borrower financial statements and tax returns, collateral valuations and operating statements, UCCs, insurance policies, loan ratings, etc. Reports that display “old” or out dated information are important especially if it can identify situations where a lot of information for a single loan is out of date. An effective, flexible and easy to use Tickler System [2] is also an important tool to ensure that data is kept up to date.
A good commercial loan system should be able to provide all of these features and much more. If you would like to see how the Madison System addresses these issues, give us a call to schedule an online demonstration.