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A Users Guide To N Abler Grading Best Practices


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A Users Guide To N Abler Grading Best Practices

  1. 1. A User’s Guide to N-Abler Grading Best Practices
  2. 2. Today’s Environment Stakeholder Demands Pressures on Profits Doing More With Less Boards, Regulators and other stakeholders are demanding more reporting, more compliance and more analysis Cost of compliance, a sluggish economy and creeping collection costs all are impacting the bottom line of most Lenders Lenders everywhere are looking for ways to maximize efficiencies and improve business without having to put out material dollars on expensive system upgrades
  3. 3. N-Abler Grading Solutions <ul><li>The N-Abler Grading helps Lenders by: </li></ul><ul><ul><li>bringing in unique reporting approaches </li></ul></ul><ul><ul><li>delivering services on an as needed basis </li></ul></ul><ul><ul><li>providing independent assessments that can be incorporated into the overall credit risk management process </li></ul></ul><ul><li>The N-Abler has multiple applications, today we will look at four of the more important functions: </li></ul><ul><ul><li>the efficiencies gradings can bring to collections work </li></ul></ul><ul><ul><li>ways the gradings can help maximize a borrower base </li></ul></ul><ul><ul><li>how the gradings can help maximize returns on capital </li></ul></ul><ul><ul><li>the value of the extended reporting and analysis </li></ul></ul>
  4. 4. Understanding the Gradings <ul><li>Each N-Abler grade carries a score of 0.0 to 5.0 </li></ul><ul><ul><li>5.0 represents the highest score </li></ul></ul><ul><ul><li>0.0 being the weakest score </li></ul></ul><ul><ul><li>grades of 3.5 or higher are generally considered strong credits by most lenders </li></ul></ul><ul><li>Each N-Abler grade provides 2 benchmarks </li></ul><ul><ul><li>the credit grade provides the indicator of borrower’s credit profile </li></ul></ul><ul><ul><li>the security grade is the indicator of strength of underlying security </li></ul></ul><ul><ul><li>grading structures between different loan classes are </li></ul></ul><ul><ul><li>similar to allow cross loan-type comparisons </li></ul></ul>Grading Scores Two Benchmarks
  5. 5. Understanding the Gradings <ul><li>N-Abler grades do not solely rely on credit scores and appraisal values: </li></ul><ul><ul><li>N-Abler grades take into key credit and economic factors that also effect grading values </li></ul></ul><ul><ul><li>Factors such as the borrower’s reliance on the underlying assets and asset disposal options are </li></ul></ul><ul><ul><li>also assessed </li></ul></ul><ul><li>The combined views provided by the two benchmarks give a clearer picture of loan and how it should be managed: </li></ul><ul><ul><li>A strong grade from one benchmark can, in part, mitigate a weakness in the other </li></ul></ul><ul><ul><li>Strengths and weakness in each benchmark can focus loan management and collections activities </li></ul></ul>Economic Factors Used in Tandem
  6. 6. Gradings and Collections <ul><li>Using the grades as indicators can better manage the realization process </li></ul><ul><li>at the earliest possible stage: </li></ul><ul><ul><li>Where there are consistently strong security grades ensure a part of your collection team is an active realization/reseller group or has a third party realization group it contracts out to </li></ul></ul><ul><ul><li>Security grades take in more factors than current market values – if a high appraisal value comes in where there is a weak security grade - investigate </li></ul></ul><ul><li>Using the grades can focus staff efforts to where they can </li></ul><ul><li>deliver better results </li></ul><ul><ul><li>A loan has a weak credit grade but a very strong security grade </li></ul></ul><ul><ul><li>may not support a protracted collection negotiation – focus staff on </li></ul></ul><ul><ul><li>securing and disposing of the asset </li></ul></ul><ul><ul><li>Tie grades to staff seniority – lowest grades should go directly to best collectors. Don’t pass on accounts with stronger grades that can be handed by more junior staff </li></ul></ul>Staff Efficiency Default Realization
  7. 7. Gradings and Collections <ul><li>On going monitoring of gradings provides in-depth risk assessments and gives Management indicators of future resource needs: </li></ul><ul><ul><li>Where a negative market event occurs the grades can provide advance indicators of loans that will require additional monitoring and administration </li></ul></ul><ul><ul><li>Correct developing negative grading trends by coaching credit underwriters to avoid them in future </li></ul></ul>Flagging Future Issues
  8. 8. Gradings and Customer Relations <ul><li>Reviewing grades should be a preliminary step to an annual review </li></ul><ul><ul><li>is the borrower’s risk satisfactory for the revenues generated </li></ul></ul><ul><ul><li>for strong customers you want to retain put flags in place to move early to reduce the risk the borrower will shop elsewhere </li></ul></ul><ul><li>Grades can differ by loan type. Don’t assume a strong borrower for </li></ul><ul><li>one loan class will be equally as strong in another </li></ul><ul><ul><li>N-Abler security grade will help identify risks between different loans from a single borrower </li></ul></ul><ul><li>Loan level grading produces a unique assessment point to compare a single loan against all other loans in the same portfolio </li></ul><ul><ul><li>while a loan may pass general acceptance guidelines grading can identify those weaker or stronger than others in the pool </li></ul></ul>Customer Retention Picking Preferred Business Portfolio Focus
  9. 9. Gradings and Revenues Risk/Return Analysis Better Capital Deployment Portfolio Rebalancing <ul><li>Grades can show where the max risk/returns are found in a portfolio grades often reflect the Lender’s best returns come from mid-range risks: </li></ul><ul><ul><li>ensure overall portfolio returns are not limited because of excessive focus on low risk / low return loans </li></ul></ul><ul><li>Grades makes the decision process to sell limited pools of loans </li></ul><ul><li>easier and more efficient: </li></ul><ul><ul><li>grades quickly identify excessive concentrations of high risk or low return loans in a portfolio </li></ul></ul><ul><ul><li>grades can accelerate the internal analysis process where loan sales are being considered </li></ul></ul><ul><li>Grades can provide a quick-view indication of whether returns are </li></ul><ul><li>in line with the underlying loan risk: </li></ul><ul><ul><li>the simple reality is that higher risk loans should come with higher interest rates not enough Lenders fully apply this rule when dealing with consumer loans and mortgages </li></ul></ul>
  10. 10. Gradings and Reporting <ul><li>Combining grades with other portfolio factors brings a new prospective to standard analysis </li></ul><ul><ul><li>compare risk grading across geographic disbursements to identify weaker locations that should be avoided </li></ul></ul><ul><li>Once initial grading has been completed targets can be set to improve future results </li></ul><ul><ul><li>set and track average security grading within a portfolio as support for regulatory reporting </li></ul></ul><ul><ul><li>set and track lower grades to assess the impact of collections costs </li></ul></ul>Cross-Risk Analysis Setting Risk Targets
  11. 11. Gradings and Reporting <ul><li>Identifying consistently strong grades can lead to new business </li></ul><ul><li>acquisition strategies: </li></ul><ul><ul><li>match risk grades to borrower industries to spot previously unidentified marketing opportunities </li></ul></ul><ul><ul><li>strong security grades concentrated in geographic locations can focus new mortgage selling activities </li></ul></ul><ul><li>Grades can be used to assess credit staff </li></ul><ul><ul><li>review averaged grade results by credit officer to identify trends or areas where coaching is suggested </li></ul></ul>Opportunity Analysis Staff Assessments
  12. 12. Thank You For more information of the N-Abler and how loan level grading can improve your lending operations please contact us anytime [email_address]