Hilltop Advisors’ Commercial Lending practice focuses on the credit/counterparty risks, regulatory compliance risk and operational efficiency. Many of our clients and participants in our Commercial Lending Risk Survey indicate that:
- Banks recognize that there are new risks caused by the pandemic, but many have not changed their risk policies, mitigation efforts and calculate potential losses,
- Banks’ credit memorandums have not changed to address the impact of the pandemic on new or existing loans,
- Banks’ loan risk rating review process has not changed to consider the impact of the pandemic on all loan types/borrower types (changes may include adding steps in the process to identify/monitor high risk borrowers, like restaurant owners, affected by COVID19.
There are many more examples of lenders not reassessing their credit and counterparty risks for the impact of the pandemic and borrowers’ shifting business strategies (example: how the office workplace is changing as a result of the pandemic).
Hilltop is assisting banks with identifying credit and counterparty risks in the following areas and helping with temporary or permanent changes to the Bank’s risk policies, loan risk ratings, loan loss estimates by loan type and what is not temporary. Examples of risk which Hilltop has identified include:
- identifying loans by business type, geography and other factors that are higher risks during a pandemic like COVID19 and how to manage such credit risk,
- identifying borrowers whose businesses are affected when key suppliers or outsourced functions cannot be performed due to the pandemic (counterparty risk),
- performing an independent review of the loan risk ratings to ensure the ratings are completed in accordance with the loan risk rating policy,
- comparing the loan risk ratings (especially on a temporary basis) to the loss reserves recorded under CECL to ensure consistency and to assess whether the credit risk analyses are addressing the impact of the pandemic,
- calculating the loss demographics for commercial loans and their use in the CECL/ALLL accounting entries,
- assessing bank’s mortgage warehouse lending, MSR lending, P&I/T&I advance funding for new credit risks, the impact on mortgage forbearances, counterparty risk between the bank and mortgage companies, etc.,
- meeting the regulatory compliance requirements (FED, OCC, FDIC, etc.) for all loans including SBA and PPP and Main Street loan compliance,
- commercial & industrial loans are affected by the virus in many ways, examples include:
- lower oil prices caused by less cars on the road,
- entertainment companies unable to produce shows, songs, movies,
- retailers that rely on physical stores vs. internet sales may not survive,
- beauty/barber salons, gyms and other “high touch” businesses are affected,
- shopping malls were in trouble and the pandemic will only add to their troubles,
- restaurants that won’t survive the pandemic, etc.
- commercial real estate loans (specifically collateral valuation) are affected by the virus as a result of higher delinquencies, “stay at home” orders and what will become a trend for companies to reduce the amount of their office space,
- determining what risks have changed for Acquisition, Development and Construction loans given the possible changes with commercial real estate loans, and
- considering how multifamily loans may perform differently (elder care facilities have been devastated versus apartments that had been satisfying millennials who wanted to be in the downtown area versus suburbs (which may have a permanent impact due to COVID19).
There are many additional risk factors that could be considered in the current economy. Hilltop can assist the Bank in assessing the materiality, prioritization and likely lifespan of these risk factors. Our team can help model the estimated losses. Please visit our website (www.thehilltopcompanies.com) for further detail on all of our services. You can participate in Hilltop’s Commercial Lending Risk Survey.
We would like to have a call to discuss how your Bank is addressing the above credit and counterparty risks. Please contact Jeff Oliver at gaoliver@thehilltopcompanies.com or call 703-801-1921.
