Independent Banker - July 2019 - 38

PORTFOLIO
7 tips for keeping
credit risk low
Risk
L
1
How to manage credit risk and avoid
the consequences of a re-emerging
subprime market. By Judith Sears
ike the monster in a horror flick, subprime
loans appear to be back from the dead. Tim
Kluender, president and CEO of $57 million-asset
Community Bank Owatonna in Owatonna,
Minn., says most community banks don't partake
in subprime lending. However, he says, " Any negative
impact on the U.S. economy has the ability
to adversely affect community banks and their
customers. " Here are some common sense ways
to avoid excessive risk.
Regularly review your lending standards.
Community banks may not be completely
insulated from the subprime market due to what
Cris deRitis, deputy chief economist for Moody's
Analytics, calls credit score migration. " If you
have a 700 credit score today, you're just below the
national average, whereas in 2009, you were well
above average, " he says. He encourages banks to
regularly review their credit score cutoff threshold
to ensure they're lending to the best borrowers.
Assess your portfolio's resilience.
Review the historical performance of your
lending portfolio relative to external benchmarks.
How did the loans you booked before or during
the last recession perform? " If you've loosened
your lending standards, you may have additional
risk, " deRitis advises.
Consider your local economy. If your
local economy hasn't seen as much income
growth as the nationwide average, that may dictate
maintaining stricter lending standards.
Look for ways to " lay off " (or decrease)
portfolio risk. Insuring your portfolio with
a third party or selling loans are both proven,
effective ways of ameliorating portfolio risk.
2
Quick stat
3
4
5
704
is the average
FICO credit score
in the U.S., the
highest average
FICO score since
2005
Train your staff. " We have ongoing product
education and underwriter training,
as we are very active in the residential housing
36 Q ICBA Independent Banker Q July 2019
Source: 2018 FICO report
Judith Sears is a writer in Colorado.
market, " says Neil Grossnicklaus, CEO of $264
million-asset Willamette Valley Bank in Salem,
Ore. " Training is important for loan officers but
also underwriters and processors due to the complexity
of the mortgage process. "
Educate your customers. Conduct regular
seminars to help borrowers better
understand their finances and obligations. Make
use of the financial literacy materials from private
providers, the FDIC and the OCC. If you put
these materials on your website, you could attract
millennial customers at the same time.
Use technology to confirm creditworthiness.
Make sure your bank is up to speed
with risk management solutions. It's now much
easier to detect fraud or learn that a borrower
already has a second mortgage.
6
7
Consumers expect banks to take the lead in
controlling risky lending. " We're supposed to be
the experts, so if we say 'yes,' that must mean it's
a good loan, " says Sean Kouplen, chairman and
CEO of $625 million-asset Regent Bank in Bixby,
Okla. " I'm now a disciple that we have to look out
for not only making loans that are good for the
bank but that are good for the client. "
Independent Banker - July 2019

Table of Contents for the Digital Edition of Independent Banker - July 2019
