Post on 28-May-2020
CUNA MBL Roundtable
Victoria Bennett
Regional Lending Specialist
Region V, NCUA
Agenda
• MBL Lending trends
• MBL Management
• Annual Reviews & File Management
• Risk Monitoring
• Receiverships
MBL TRENDS
4
0
5
10
15
20
25
30
35
40
45
50
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Member Business Loans1995-2014, billions of dollars
MBL outstanding in 2014Q2: $46.0 billion
2014 data are for 2014Q2
6
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Member Business Loan Delinquency Rate1995-2014, percent
MBL delinquency rate in 2014Q2: 132 basis
2014 data are for 2014Q2
MBL Share of Assets
7
U.S. share : 4.2%
MBL MANAGEMENT
Loan Management
Generally, two types of management:
Transactional
Relationship
Transactional Management
• Loans are granted, then monitored annually or if in distress
• Otherwise, servicing mostly consists of collecting payments
• Low operating costs…
Potentially higher losses
Relationship Management
• Borrowers assigned to a loan officer, who provides high-contact, personal service
• Often involves consulting/business advice
• Higher up front costs (possibly much higher)…
Potentially lower losses
Differences
• Relationship lending gives early warnings
– But measuring the benefit of the extra expense may be difficult
• Transactional lending does not
– Often first sign of distress is delinquency
– In commercial lending, this may be too late
Which Is Preferable?
• Management’s decision…
• Be aware of possible difficulties with transactional:
– In bad times, the cost of servicing will increase (possibly substantially)
– The number of loans can exacerbate the problem
ANNUAL REVIEWS & FILE MANAGEMENT
Site Visits
• These should be documented with photos and specifics about the condition of the collateral.– Numerous good apps available– Or paper list, but details are important– The list of items should be specific, such as the
condition of:• Landscaping• Hallways• Asphalt parking lot…
How Often Should Site Visits Occur?
• That depends…
– Is the borrower delinquent?
– Is the property in a high-crime neighborhood?
– What is the use of the property?
• Owner-occupied office building or, say,
• A frat house…
Loan Officer NotesAKA Call Log, Chron Log, Chronological Log…
• In a current loan in transactional based operations, may not be any other than from origination
• More important loan as becomes distressed
• E-mails…
– Cut and paste into the log is fine if sufficiently detailed
– Please don’t just hand us a stack of printed e-mails
Any Exceptions to Annual Reviews?
• Last year’s discussion item: do smaller loan files require annual reviews?
• That depends:– Consider a borrower with one $60,000 non-owner
occupied rental property. Full review with financials?
– What if that borrower had ten such properties?
RISK MONITORING
Monitoring
• Establish portfolio concentration limits. (10-CU-03)
• Use either a data warehouse or spreadsheet or some other method to track information about individual files – examples:– Date of most recent annual review
– Date of most recent financials
– Date of most recent inspection
– Tax delinquency
Risk Grades
• Risk grades should correspond to the ALLL –and vice versa.
• They should be updated, as needed, prior to finalizing the ALLL analysis.
Risk GradesCriteria should be:
• Qualitative
• Quantitative
• Allow for judgment calls– Please document when this occurs!
• Also consider: how much of your portfolio is one grade?
External/Internal MBL Loan ReviewAcct. Bull.#06-01 Interagency Guidance for ALLL, appendix 1
• Frequency
– It depends
• Like an external audit, you should:
– Consider the background of the reviewer,
– Perform due diligence,
External/Internal MBL Loan Review
• Elements of the loan review.– Qualifications of the loan review personnel.
– Independence of loan review personnel.
– Frequency of a review.
– Depth of the review.
– Report findings to Staff, Management and Board.
– Management action plan.
Other Contents of the Review
• Engagement letter outlining the expectations:
• Scope of the review– Size of the sample
– Characteristics of loans to be reviewed
• Recommended risk rating changes.
• Should analyze the institution’s risk rating accuracy.
RECEIVERSHIPS
What are Receiverships?
• A receiver is a neutral third party, appointed by the court, who takes temporary control over a property when the property is distressed.
• The receiver’s primary responsibility is to recoup as much of the unpaid loan as possible.
What Are Receiverships?
• Take place under court order with or without the borrower’s consent.
• Done at the behest of lender(s).
Reasons for Receiverships
It protects the lender from the risk the borrower will mismanage property or misappropriate revenue…
and prevents the deterioration of property while under the control of distracted and/or penniless borrowers.
Specific Examples
• Real Estate loan in default
• To collect rents
• To collect assets and liquidate collateral
• To protect the collateral
Protections Provided
• The lender never goes on title
• The lender never becomes the operating manager
– Protection from:
• Environmental laws/EPA
• General liability lawsuits
• Tenant claims
• Code Enforcement actions…
Receiver
• Takes responsibility for the business
– Must act within the court’s directive
• Operates the business while resolving case
– Collects cash
– Pays the bills
• May liquidate the business
Important!
• The receiver answers to the court…
NOT to the lender or the borrower.
Other Drawbacks…
• It’s expensive.– Really expensive. Up to $200 - $500 per hour
• The court appoints the receiver.– The lender can suggest the receiver…
• But ultimately, the judge makes the decision.
• The receiver is paid first.– If the proceeds aren’t sufficient, they may have
recourse against the party who requested the receiver.
Suggestion:
• For large problem workouts, consider a receiver.
• May be especially helpful in a participation.
• Weigh the cost against the benefit!
• Document the decision process in the files.
If You Want to Use a Receiver
• Talk to your attorney
• Include the cost analysis in the file
• If the property requires improvements, be prepared to fund them
– “Receivership Certificate” (the funding doc) takes first lien position
– If you don’t fund the certificate, a third party could at very high cost
If You Want to Use a Receiver
• Be prepared for the borrower to file bankruptcy
– An ex parte (“for one party”) action keeps the receiver in place
• Be prepared for a long resolution period