servicing mbl - commalliance.accountsupport.com€¦ · servicing mbl ©2018 commercial alliance,...

M.B. Ducher

Executive Vice President

SERVICING MBL

©2018 Commercial Alliance, LLC – Confidential and Proprietary

Revised April 2, 2018

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SERVICING FOR MBL’S IS NOT AN

OPTION

YOU WILL DO IT!

WE ARE SORRY FOR YELLING, BUT YOUR CUSO IS ALWAYS

SADDENED BY WHAT OUR CU’S GO THROUGH AT EXAM TIME WHEN MBL SERVICING IS NOT

BEING DONE……

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Benefits for CU:

✓ Allows Aggressiveness in Marketing and Growth

✓ Saves Money and Time

✓ Promotes Loan Control – COMPLIANCE!

COMMERCIAL ALLIANCE SERVICING

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External Servicing:

• 100 Basis Points (BP) = 1%

• 75 BP

• 65 BP

• 65 BP with FREE Annual Review

How low can it go???

COMMERCIAL ALLIANCE SERVICING

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COMMERCIAL ALLIANCE SERVICING

Benefits for CU:

✓ Fosters Portfolio Growth

✓ Allows CU to Focus on Loan Originations

✓ Did we mention Compliance?

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KEY ELEMENTS OF MBL SERVICING

➢ Loan Accounting, Payment Location

➢ Loan Participation Tracking/Reporting

➢ Ticklers Set, Maintained and Acted On

➢ BFS, PFS, BTR, and PTR – All Entities and Guarantors

➢ Insurance, Property Taxes and UCC Equity

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KEY ELEMENTS OF MBL SERVICING

➢ Loan Review Date and Maturities

➢ Pre-Loan Maturity Actions

➢ Collateral Revaluation – LTV

➢ Rent Roll and Lease Updates

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KEY ELEMENTS OF MBL SERVICING

➢ Credit Reports on Guarantors

➢ Delinquency and Site Visit Reports (CU)

➢ Loan Officer and Examiner Comments

➢ Corrective Actions Documented

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PUT YOUR TIME AND MONEY INTO ORIGINATION

Requires initial file review by CUSO – unless servicing begins at loan origination.

COMMERCIAL ALLIANCE SERVICING

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Receive Monthly Reports On:

✓ Loan Accounting at CUSO (Off CU Book)

✓ Loan Balance, Interest Accrual, Last Payment

and Next Due

✓ All Ticklers as Discussed per Agreement

COMMERCIAL ALLIANCE SERVICING

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Receive Monthly Reports On:

✓ BFS, BTR, PTR, PFS, UCC, Credit Reports

✓ Annual Reviews are Automatic (with info)

✓ Loan Maturity and Collateral Revaluation Dates

✓ Property Taxes and Insurance

✓ Member Notification of Above

COMMERCIAL ALLIANCE SERVICING

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Key Thoughts:

❖ STILL – “NO SET AND FORGET”

❖ REGULAR COMMUNICATION NEEDED

COMMERCIAL ALLIANCE TO CREDIT UNION

❖ A TWO WAY STREET!

COMMERCIAL ALLIANCE SERVICING

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COMMERCIAL ALLIANCE OPTIONAL SERVICES

✓ Loan Work Out Assistance

✓ Litigation Management

✓ Site/Member Visits

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LOAN RESERVES AND RISK RATINGS

1. Elements and Risk Ratings of Loans

2. Loan-Loss Reserve Approaches – FAS 5 and

FAS 114

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MBL RISK RATING SYSTEM1 THROUGH 9

Refer to Handout #1

➢ Levels 1 through 5 – Increasing Risk = PASS

➢ Level 6 – Special Mention

➢ Level 7 – Substandard

➢ Level 8 – Doubtful

➢ Level 9 – Loss

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LEVEL 1 – PASS

Excellent Credit Risk (Very Rare!)

✓ Great Margins – no market risk

✓ Unquestionable Borrower and Guarantor Strength

✓ Worthy Unsecured – Leverage = RMA Upper

Quartile

✓ Profits and Positive Cash Flow Last 5 Years –

Upper Quartile

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LEVEL 2 – PASS

Good Credit Risk (Rare!)

✓ Strong Local Credit

✓ Strong Balance Sheet

✓ Leverage, Profits = RMA Upper Quartile

✓ Profits and Positive Cash Flow 4 of Last 5 Years

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LEVEL 3 – PASS

Satisfactory Credit Risk

✓ “Typical” Borrower

✓ Current Ratio Better than 1 to 1

✓ Leverage, Profits = RMA Median

✓ Profits and Positive Cash Flow 3 of Last 5 Years

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LEVEL 4 – PASS

Acceptable Credit Risk

✓ Minimal but Positive Underwriting Margins

✓ Some Market Risk

✓ Leverage, Profits Below RMA Median

✓ Deterioration Not Expected

✓ Profits and Positive Cash Flow 2 of Last 5 Years

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LEVEL 5 – PASS

Marginal/Acceptable Credit Risk

✓ Possible Future Problems but NOT Special

Mention

✓ Late on Financial Information – Adverse

Industry Trend

✓ Not Likely to Improve as New Credit

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LEVEL 6 – SPECIAL MENTION (SM)

Regulatory Definition:

• Potential weaknesses = Management’s close

attention.

• If uncorrected, may result in deterioration of

repayment prospects at some future date.

• SM is not adversely classified and does not have

sufficient risk to warrant adverse classification.

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LEVEL 6 – SPECIAL MENTION (SM)

SM Causes:

• Elevated Risk and/or Adverse Operating Trends

• Declining Revenue or Margins

• Increased Inventory without Increased Sales

• High Leverage – Tight Liquidity

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LEVEL 6 – SPECIAL MENTION (SM)

SM Causes:

• Adverse Economic or Market Conditions

• Management Problems – Pending Litigation

• Ineffective Loan Agreements

• Deviation from Prudent Lending Practices

• Default is NOT Imminent

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LEVEL 7 – SUBSTANDARD (SS)

Regulatory Definition:

• Inadequate worth, paying capacity or collateral

has a well-defined weakness that jeopardizes

liquidation of the debt.

• Distinct possibility of some loss if deficiencies not

corrected.

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LEVEL 7 – SUBSTANDARD (SS)

SS Causes:

• High Probability of Default

• Well-Defined Weaknesses

• Require Intensive Supervision by Management

• Current or Expected Losses

• Inadequate Debt Service

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LEVEL 7 – SUBSTANDARD (SS)

SS Causes:

• Inadequate Liquidity, Marginal Capitalization

• Repayment may depend on collateral – full

collection of debt may be in doubt (such loans

should be placed on nonaccrual)

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LEVEL 8 – DOUBTFUL

Regulatory Definition:

• Has all the weaknesses of a substandard with

added characteristic – collection or liquidation in

full.

• Based on currently existing facts and values

highly questionable/improbable.

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LEVEL 8 – DOUBTFUL

Doubtful Causes:

• High Probability of Total/Substantial Loss

• Specific Pending Events May Strengthen Asset

• So Loss is Deferred (Must Document!)

• Usually in Default, Lacks Adequate

Liquidity/Capital to Remain an Operating Entity

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LEVEL 8 – DOUBTFUL

Notes:

• Pending events can include: merger, acquisition,

liquidation or capital injection.

• Perfection of liens of additional collateral

• The valuation of collateral, refinancing

• Pending events should be resolved in a short period.

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LEVEL 9 – LOSS

Regulatory Definition:

• Considered uncollectable/worthless asset through

partial recovery may be in future.

• Bankruptcy or suspended debt repayment.

• Ceased business operations.

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LEVEL 9 – LOSS

Notes:

• Little Prospect of Collection.

• Require Long-Term Litigation or Lengthy

Recovery Efforts.

• Losses are to be recorded in the period an

obligation becomes uncollectible.

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HTTP://WWW.OCC.TREAS.GOV/HANDBOOK/RCR.PDF

LOAN CLASSIFICATION REFERENCE

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ALLOWANCE FOR LOAN AND LEASE LOSSES (ALLL)

✓ Loan Loss Reserve Allocation – 2 Approaches

✓ Financial Accounting Standards – FAS 5 and

FAS 14

✓ Use One or the Other – NEVER BOTH!!!!

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FAS 5 SUMMARY

✓ Common accrual of loss contingency

✓ A collective evaluation on loan groups with

similar characteristics

✓ Examples: commercial mortgages, autos, credit

card portfolios based on historical loss

experience of group

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FAS 5 SUMMARY

✓ Adjusted for trends, conditions, factors that

may affect overall repayment of portfolio

✓ Applied as an ‘unallocated” portfolio wide ALLL

based on portfolio percentage or basis point

collaboration

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FAS 114 SUMMARY

✓ Individual loss allocation on a specific loan

✓ To identify risk in that particular loan

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FAS 114 SUMMARY

✓ To determine to be impairment use 1 of 3:

1. Present value of expected cash flows –

discounted/effective interest rate (cash flow

analyzed based on current interest rate (Prime +)

to derive the debt service coverage of that entity

today)

2. The loans observable market price

3. Fair value of collateral dependent – most

common

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FAS 114 SUMMARY

✓ Loan is collateral dependent if repayment is

expected solely by collateral value

✓ Estimated costs to sell collateral are

considered

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FAS 114 SUMMARY

✓ Must document logic: loan file + support by

written analysis

✓ Must contain a resolution plan reviewed

quarterly

✓ Refer to Handout @#2

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FAS 114 SUMMARY

Additional Reference:

Interagency Policy Statement on the Allowance for

Loan & Lease Losses (2006), NCUA letter 7535-01-U

Allowance for Loan & Lease Losses Methodologies

and Documentation for Federally Insured Credit

Unions – IRPS 02-3 available at www.ncua.

gov/RegulationsOpinionLaws/IRPS02-3

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ALL METHODOLOGY BY LOAN RATING

1) Pass – FAS 5 (no specific reserve)

2) Pending/Watch – FAS 5

3) Special Mention – Review under FAS 114

(if zero reserve identified then include under

FAS 5 methodology)

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ALL METHODOLOGY BY LOAN RATING

4) Substandard – Review under FAS 114

(if zero reserve identified then include under

FAS 5 methodology)

5) Doubtful – Must be nonaccrual, FAS 114

6) Loss – Must be 100% reserved and charged

off in quarter recognized

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SERVICING RECAP

✓ React to monthly exception reports!!!

✓ CUSO loan reviews on loans enhances

compliance, portfolio/risk management

✓ In-house review of files

✓ Loan officer file comments/actions

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SERVICING RECAP

✓ Always necessary to show examiners

management is reacting appropriately to

recommendations and policy compliance

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MONITORING AND FOLLOW UP

➢ Policy requires tracking of required updates of

financial information annually

➢ BFS, PFS, PTR, BTR with an annual review

➢ Review and amend its risk rating periodically

on loans

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DUE DILIGENCE

Review disbursed loans for:

✓ Correct documentation

✓ Conformance with Policy/Approval

✓ Noted deficiencies and remediation

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LOAN MATURITIES

▪ Balloon Payments and Maturity Dates next 180

days – LOOK FORWARD!

▪ Need Internal File Review – Tickler Check

▪ Taxes/Insurance/UCC/Financial Information

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LOAN MATURITIES

▪ Appraisal Review – File Deficiencies

▪ File Comments, Collateral Inspection

▪ CUSO Annual Review Pending?

▪ And………

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LOAN MATURITIES

▪ Send a letter out 120 days prior to maturity

including a description of the loan and documents

(financial data) required to renew

▪ Assign Loan Officer to contact

▪ Instruct Borrower to contact Loan Officer

▪ Be Proactive!!!!

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Thank You for Attending!!!

©2018 Commercial Alliance, LLC – Confidential and Proprietary

M.B. DUCHER

EXECUTIVE VICE PRESIDENT

Phone: 586.604.1592

Email: MDUCHER@commercialalliance.com