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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: [email protected]
