Credit Risk Management Controls

December 29, 2022 QUESTION Our regulator has said we have numerous defects in our credit risk practices for loan underwriting. This came as a shock to us since we have a low foreclosure rate. Nevertheless, the examiner says we have no control process for a self-assessment.  To satisfy the regulator, we must put together a self-assessment policy and procedure to handle credit risk underwriting. We don’t know where to start.  If we knew the control areas of credit risk management that the examiner wants us to self-assess, we could draft a self-assessment process. So, we’re writing you for some feedback. Thank you for these weekly newsletters!  What are some controls involving credit risk underwriting practices? ANSWER You bring up an important distinction that many companies do not consider. There is a difference between risk assessments generally and the correlative control areas subject to review. The control areas are the framework on which the risk assessments are built. But you must outline those areas, or the self-assessment is an aimless set of procedures with limited value to management.   To begin, you should define the regulatory risk. For instance, you could define the self-assessment’s purpose as evaluating the underwriting practices for new loans in residential real estate. Keep in mind that your assessment would consider the guidelines provided by investors and state and federal agencies.   You must assess your risks and adjust your approach to make informed underwriting decisions and manage credit risks throughout the life of the loans, if applicable. I will provide a few control areas that should be the bases on which the self-assessment is established. My suggestions are by no means to be viewed as comprehensive. In fact, I am only touching on the ‘tip of the iceberg’ in self-assessments involving credit risk management. FEATURED  COMPLIANCE TUNE-UP QC TUNE-UP MORTGAGE QUALITY CONTROL

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