The Hilltop Companies risk management assessment for the Credit risk area incorporates all of the other related credit services that we provide. Our credit risk policy, structure, process, and controls assessment, our loan reviews (when completed) and our ALLL analysis (when completed) are integrated to help our clients’ in creating or improving their credit risk policy and overall approach. We can assist in establishing or revising your ALLL policy. And we can help establish a compliance testing process.
Our credit risk analysis goes beyond the loan portfolios. We are very focused on lenders who have sold loans with recourse, have representations and warranties on loan performance, and have agreed to indemnify purchasers of such loans for losses incurred. This type of credit risk was a significant component of the “mortgage crisis”. Our approach to these types of credit risk is to analyze from many perspectives – risk management, accounting, regulatory net worth, and overall exposure to credit losses.
A lender may have excellent credit risk policy in place but without effective loss mitigation techniques – credit losses will accumulate and likely attract the attention of the regulator. Our consultants with operational experience in the credit loss mitigation area have “hands on” knowledge of the credit loss mitigation efforts that are expected to be performed (whether dictated by bank policy, Federal or State regulators or the investors who own such loans). Our loss mitigation efforts include identifying techniques that will reduce credit losses as well as make your company compliant with the applicable regulations. Our assessment typically involves critiquing the processes, people, and technology used in the loan default management area (residential or commercial/multifamily). We will often introduce a “triaging” concept to gain more efficiency in the loan workout efforts and effectiveness of the restructuring result (reduce or minimize re-defaults). In both the financial and operational assessments, assessing the loan portfolios’ credit performance (by identifying all significant risk components and trends), “grading” data quality and integrity, tracking costs of restructuring, identifying financial tools is all critical to identifying opportunities for enhancement. We have also integrated elements of our independent loan review services (all loan types), our default servicing and foreclosure assessment services and our valuation services to be able to provide a strong analytical approach and supporting documentation for all ALLL and reserve calculations made by our team.
Our credit risk management assessment will also consider the models and other credit analysis tools that are being used. Valuation tools and databases are also an important component in quantifying credit risk. Our team has worked with and created many credit loss models (especially the NPV models and the modeling of financial alternatives related to loan restructuring). We understand how they should work, how the results should be used and how the regulators will interpret such. Of course, our focus on the accounting impact of credit losses is never lost. Our credit risk management assessment will review the process from identifying potential credit losses through to the final entries for the ALLL. We have found examples where clients have established the right credit policy, completed the appropriate credit risk analysis and quantification, only to then misinterpret such results when calculating the ALLL and thereby misstating the allowance for loan losses or the reserves for repurchases/warranties/indemnifications. As former CFOs, bank examiners or auditors, we understand the financial and operational aspects of the credit risk function.
To ensure the appropriate credit risk management policy and process is in place, our credit risk team will perform asset quality and risk evaluations for various types of assets. We can also provide valuations of such assets and assist with the fair market value accounting required by FAS 157/159. Our team has specific expertise in the following asset types:
- Residential mortgages
- Commercial mortgages
- Multifamily mortgages
- Commercial loans
- Home equity lines/loans
- Auto and other consumer loans
- Credit card portfolios
- Financial instruments
- REMICs, CMOs, other MBS or ABS structured finance assets
- CDO, CLO investments
- Mortgage Servicing Rights (MSRs)
- Other loans and intangibles
Our credit risk management reviews can be completed on a project basis or as an on-going monitoring effort performed by an independent consultant.