Chapter 10 - Examiners Guide - NCUA Homepage

Chapter 10

LOANS

TABLE OF CONTENTS

PART I LOANS .GENERAL LOAN REVIEW ........................................................... 10/1-1

Examination Objectives .......................................................................................

10/1-1

Associated Risks .................................................................................................. 1O/1. 1

Overview.............................................................................................................. 10/1-3

. . Guidelines

. . ....................................................................................... 10/1-3

Examination

Loan Documents .................................................................................................. 10/1-5

Loan Exceptions..................................................................................................

.lo/ 1.5

Impermissible Loans ............................................................................................

10/1-6

1O/l -6

Loan Programs and Policies .................................................................................

Lending Practices ................................................................................................. 10/1-9

10/1-10

Credit Report Analysis.............................................................................

Capacity to Repay .................................................................................... 10/1-1 1

Credit Scoring ..........................................................................................

1O/1.

1 1

Paperless Lending ................................................................................................ 10/1. 13

Examiner Guidance..................................................................................lO/

1-13

1-14

Risk-Based Lending .............................................................................................lO/

10/1- 15

Large Loans and Concentrations..........................................................................

AIRES .................................................................................................................. 10/1-15

1O/1-16

Workpapers and References.................................................................................

CREDIT

RISK,

DELINQUENCY,

&

CHARGE

OFFS

...................

10/2-1

2

LOANS

PART

Examination Objectives ....................................................................................... 10/2-1

Associated Risks .................................................................................................. 10/2- 1

Overview.............................................................................................................. 1012-1

2-1

Evaluating Credit Risk ......................................................................................... 1O/

Delinquency Control ............................................................................................

10/2-3

Collection Procedures .......................................................................................... 10/2-5

1O/

2-7

Extension and Refinancing ......................................................................

Credit Card Collection Program .............................................................. 1012-8

B d p t c y ........................................................................................................... 10/2-8

Forms of Bankruptcy Relief .....................................................................

10/2-8

Automatic Stay......................................................................................... 10/2-10

Discharge - Objections and Exceptions ................................................... 10/2-10

Reaffirmation ........................................................................................... 10/2-12

Transfers Not Promptly Perfected or Recorded ................................................... 1O/2- 12

Statutory Lien .......................................................................................................lO/

2-12

Loan Loss Ratio (Net Charge Offs to Average Loans) ............................ 1O/ 2- 13

q c-9

EXAMINER'S GUIDE

PART 2 LOANS .CREDIT RISK. DELINQUENCY. & CHARGE OFFS

Continued

Charge Off of Problem Credits ............................................................................

Collateral in Process of Liquidation.........................................................

Other Real Estate Owned (OREO) ..........................................................

Accounting for OREO .............................................................................

Workpapers and References.................................................................................

APPENDIX 1OA - LOAN TYPES ..................................................................................

Loans to Insiders ..................................................................................................

Co-makers and Co-signers ...................................................................................

Policies and Procedures ...........................................................................

Lines of Credit .....................................................................................................

Internal Controls for Plastic Cards ...........................................................

Monitoring Lines of Credit ......................................................................

Open-End Loans ..................................................................................................

Variable Rate Loans .............................................................................................

Guaranteed Student Loans ...................................................................................

Due Diligence on Student Loans .............................................................

Real Estate Loans .................................................................................................

The Secondary Market .............................................................................

Appraisals ................................................................................................

Evaluating Appraisers ..............................................................................

Holding versus Selling Loans ..................................................................

Servicing Mortgage Loans .......................................................................

Servicing Rights: Sell or Keep .................................................................

Selling of Servicing Rights ......................................................................

Escrow Accounts .....................................................................................

Foreclosures .............................................................................................

Internal Controls, Segregation of Duties..................................................

Independent Quality Control....................................................................

Asset/Liability Management ....................................................................

Adjustable Real Estate Loans ..................................................................

Subordinate (Second) Mortgages.............................................................

Home Equity Lines of Credit ...................................................................

Loans Secured by Mobile Homes and Real Estate ..................................

Insured - Guaranteed Loans.....................................................................

Auto-Equity Loans ...................................................................................

Construction Loans ..............................................................................................

Land Loans ...........................................................................................................

Member Business Loans ......................................................................................

Policies and Procedures ...........................................................................

Underwriting ............................................................................................

Documentation.........................................................................................

Environmental Protection Agency (EPA) Concerns................................

Types of Member Business Loans ...........................................................

10/2. 14

10/2. 16

10/2-16

10/2. 17

1O/ 2.

1 7

1OA- 1

1OA- 1

10A-1

10a-2

10a-3

10a-4

10a-5

10a-5

10a-5

10a-7

10a-7

10a-8

10a-9

1OA1 0

1OA1 1

1OA1 1

1OA1 2

1OA1 2

1OA1 2

10A-15

1OA-15

10a-16

1OA1 6

1OA1 6

1OA1 7

1OA-17

1OA1 8

1OA-20

1OA-20

10a-2 1

10a-2 1

1OA-23

10a-23

10a-24

10a-24

10a-26

10a-27

1OA-28

LOANS

APPENDIX 1OA .

LOAN TYPES Continued

Rental Property Loans ..............................................................................

Working Capital Loans ............................................................................

Term Business Loans ...............................................................................

Agricultural Loans ...................................................................................

Letters of Credit .......................................................................................

Floor Plan Loans ......................................................................................

Examination Guidance.............................................................................

SBA LOUIS...........................................................................................................

Participation Loans ..............................................................................................

Purchase, Sale and Pledge of Eligible Obligations ..............................................

Stock Secured Loans ............................................................................................

Loan Policy and Procedure ......................................................................

Required Documents................................................................................

NCUA Guaranteed Loans ....................................................................................

Indirect Dealer Financing Programs ....................................................................

Policies and Procedures ...........................................................................

Potential Problems ...................................................................................

Warning Signs..........................................................................................

Regulatory Issues .....................................................................................

Direct vs. Indirect Point of Sale Programs...............................................

Leasing .................................................................................................................

Residual Value Insurance .........................................................................

Auto Insurance .........................................................................................

Regulation ¡°M¡¯ ........................................................................................

Income on Leases .....................................................................................

Leasing Program Problems ......................................................................lO

Balloon Notes .......................................................................................................

Boat Loans ...........................................................................................................

APPENDIX 10B - Glossary of Loan Terms ...................................................................

APPENDIX 1OC - Member Business Loan Financial Ratios .........................................

APPENDIX 1OD - Sample IDFP Agreements ................................................................

APPENDIX 1OE - Real Estate Documentation Checklist...............................................

1OA-28

10a-28

1OA-30

10a-30

10a-3 1

1OA-32

10a-33

10a-34

10a-34

10a-35

1OA-35

10a-36

10a-37

10a-38

10a-39

10a-40

10a-41

10a-43

10a-43

10a-44

10a-45

10a-46

10a-46

10a-46

10a-48

A-49

10a-5 1

10a-5 1

10B-1

1OC- 1

1OD- 1

1OE- 1

Chapter I 0 - Part 1

LOANS - GENERAL LOAN REVIEW

Examination

Objectives

Evaluate management¡¯s ability to identify and manage risk

Evaluate the quality of the loan portfolio and the extent of related

risks in lending activities

Evaluate whether management has established adequate lending

standards and maintains proper controls over the program

Determine whether management adequately plans for all lending

programs, committing the necessary resources in terms of

technology and skilled personnel

Assess whether the credit union has the financial capacity to

conduct lending safely, without undue concentration of credit and

without overextending capital resources

Analyze the loan portfolio¡¯s performance, including profitability,

delinquency, and losses

Consider management¡¯s response to adverse performance trends,

such as higher than expected delinquencies, charge-offs, and

expenses

Determine if the credit union¡¯s compliance program effectively

manages the fair lending and consumer protection compliance risks

Determine whether management has implemented an effective

internal loan grading system (if applicable) to identify credit risk

Associated

Risks

Credit risk. Credit risk, which involves the ability of the member to

repay the obligation, affects all types of loans. Loans with a

guarantee (student, VA, SBA, FHA, NCUA purchase) contain a

lesser degree of credit risk.

Compliance risk. Each loan type has various degrees of compliance

risk. Various NCUA regulations, state laws, and federal consumer

compliance laws apply to both consumer loans and real estate

loans. Failure to comply with these laws and regulations exposes

the credit union to fines, civil money penalties, and diminished

reputation.

Page 1011-1

EXAMINER¡¯S GUIDE

Page 1011-2

0

Interest rate risk. Interest rate risk increases as the terms of the

loans extend. Monitoring this risk involves a large segment of a

credit union¡¯s asset-liability management (ALM) program. Credit

unions engaging in real estate lending should recognize that

changes in interest rates affect the fair value of their balance sheet.

Variable-rate loans also can experience interest rate risk since they

may contain lifetime and periodic ¡°caps¡± that limit the credit

union¡¯s ability to increase (reprice) loan rates.

0

Strategic risk. Strategic risk appears in the diversification of loans

offered to members. Management¡¯s due diligence in the planning

effort before implementing new loan programs will greatly affect

the amount of this risk. A well-established program should have

less risk than a proposed or newly instituted program.

0

Transaction risk. Numerous transaction risks accompany lending.

The strength of the credit union¡¯s internal controls will determine

the extent of the risk. Management may demonstrate their control

of transaction risk through reviewing internal reports such as Paid

Ahead Loans, Non-Amortizing Loans, File Maintenance,

Supervisory Override, Accrued Interest Greater than Payment, etc.

Appendix 4B to the Internal Controls chapter of this Guide

discusses other specific loan-related reports.

0

Liquidity risk. The success of any lending program determines the

level and type of liquidity risk involved. Credit unions engaging in

real estate lending should evaluate and understand the variability of

mortgage cash flows and the corresponding effect on its balance

sheet. When interest rates fall, mortgage cash flows increase;

conversely, when interest rates rise, mortgage cash flows decrease.

This could result in a credit union having either too much or too

little liquidity. To control liquidity risk, management must

understand the interrelationships of interest rates, mortgage cash

flows, prepayment risk, extension risk, and the effect on the fair

value of its assets.

0

Reputation risk. Lending and the types of loan programs offered

greatly affect reputation risk. Collection efforts, or lack of them,

influence the members¡¯ perception of the credit union, as do

lending personnel and how they deal with the public. If the credit

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download