Identifying Issues – Loan Level Analysis

Loan level analysis and CECL auditing

Following the global financial crisis of 2007–09, the FASB issued Accounting Standards Update 2016–13, also known as Current Expected Credit Loss (CECL). Using CECL, banks can proactively react to actual and anticipated changes in the credit environment by detecting expected credit losses early. Such turbulent times call for increased loan-level analysis of the CECL process and methodologies. Auditors are focused on loan data, expected credit loss results, and the methods used to arrive at these results. It is imperative for lending institutions to monitor their loan pools regularly so they have the relevant data ready for auditing purposes and can compare CECL results from one period to another to locate and rectify any issues.

Factors that can affect a loan pool

1. When a pool involves significant product, industry, region, or borrower risk, allowance can be highly sensitive to changes in the credit environment and can result in credit losses.
2. Unexpected economic events such as the COVID-19 pandemic, which had a massive impact on economic activity.
3. Many financial institutions experienced a hike in allowance because of their exposure to dine-in restaurants, hotels, and oil exploration industries.
4. Credit scores are important indicators of credit risk and play a vital part in determining interest rates for a loan.
5. Debt-to-Income (DTI) is an important indicator of risks that exist for residential loan portfolios.
6. The borrower's payment history over a period of the loan can affect a loan pool and its credit risks.
7. Property value appreciation over the life of a loan can affect the riskiness of a loan portfolio.

Institutions will have to put a framework in place for the ongoing monitoring and maintenance of their loan portfolio. They can increase profitability by pricing loans accurately at origination, and the risk profile gets a boost by monitoring performance over the duration of the loan. Institutions need the ability to forensically take apart a loan portfolio and identify any relevant issues that might affect CECL results. Sometimes loans need to be individually evaluated as they no longer exhibit common risk characteristics when compared with other loans in the portfolio. CECL is an ongoing process that banks need to get right by striking the right balance between profitability and maintaining reserves for expected losses.

CECL Express can help…

CECL Express is a turnkey solution that fully satisfies all elements of the new CECL accounting standard. The system provides all non-loan data, including:

• Yield curves and Fed data
• Linked reports on losses from the FFIEC and NCUA
• PD and LGD curves
• Macroeconomic data

Banks and credit unions need to only provide the underlying loan details for the system to provide fully auditable ECL results for multiple calculation methods, including:

• Vintage
• Roll Rate
• Discounted Cashflow
• WARM
• PD/LGD

CECL Express provides more than valid ECL results. The system computes results for all methods and all loan pools, allowing the bank to optimize its CECL configuration and avoid the worst impacts of the new standard.