I had the pleasure of attending this week’s annual conference of the Risk Management Association in one of my favorite cities: Boston. The conference brought together nearly 600 professionals at every level of the risk spectrum, and the optimism was palpable. Driving back from the conference, there were three things that stuck out in my mind. OK, four (and the best is last). Here goes:
- Loan monitoring will be the “next shoe to drop.”
Are banks monitoring collateral throughout the loan term? Not really. Do regulators like the OCC and FDIC expect them to? Absolutely. The reality is that, despite regulators’ efforts, monitoring property risk over the course of a loan gets far less attention from lenders than underwriting prior to loan origination. The problem is that monitoring hundreds of properties systematically is no small task. This could be changing.
“Pay attention to what’s in the 2013 OCC handbook on loan monitoring. Our industry, as a whole, needs to come up with some way of doing this. Most lenders are aware of the need for a more-than-annual process of flagging issues on their loans. Given the current concern from the OCC for watching lenders’ CRE concentrations, you need to come up with some way of periodically monitoring environmental risk. It’s going to be the next shoe to drop.”
Dev Strischek, SVP & Senior Credit Policy Officer, Corporate Risk Management, SunTrust Bank
- “Risk is never static.”
This simple, and accurate, observation was made by Thomas Curry, Comptroller of the Currency, OCC, in his opening keynote. The risks that lenders face rise and fall over time with changes in the market, and right now we’re fortunate to be in a good one. Banks are “generally profitable” and low interest rates are spurring borrowing and investment. Mark Zandi, Chief Economist, Moody’s Financial reinforced this in his own keynote, optimistically titled “In the Sweet Spot,” noting that there is “a lot of juice” fueling the market right now. Given the recovery in lending, some loans today are going to customers who would not have qualified three or four years ago as banks get more comfortable with risk in order to hold their own against competition for loans, revenue and market share. Curry acknowledged an easing of overall underwriting, very common in the latter stages of an economic recovery, but reminded attendees that it is crucial that concentrations are soundly managed and properly reserved for.
“We can ensure safe and sound lending practices if we take steps now to address future risks.” Thomas Curry, Comptroller of the Currency, OCC
- Appraisal and environmental cannot be uncoupled.
Lenders and borrowers often approach real estate appraisals, environmental reviews, construction monitoring and flood insurance as separate and distinct steps in the process. Experts from Santander Bank and Citizens Bank made a strong case for abandoning a silo approach in favor of a more synergistic one. In day-to-day operations, these functions can and do impact each other. For instance, contamination at a property could impede a redevelopment schedule and the final “as complete” valuation. If an appraisal identifies a significant deferred maintenance issue (e.g., a leaking roof), this issue can result in an environmental condition (e.g., mold). Deferred maintenance issues identified during the appraisal or environmental assessment may also trigger the need for a Property Condition Assessment. One strategy recommended for transitioning to a more integrated risk management function was adopting an integrated system to house all real estate risk records in a “one-stop shop for business units.”
“Santander Bank’s Susan Peck shared vivid examples that validated my belief that clients benefit from incorporating as much site information as possible during the due diligence period. Specifically intertwining the data gathered for a Phase I Environmental Site Assessment (ESA) with appraisal data can reveal key details regarding the subject property and surrounding properties that aid in ascertaining potential risk. I appreciated the panel’s candor about the intricacies of their risk management process. Ideally, other financial services institutions will heed their solid advice.”
Elizabeth Krol, PG, National Client Manager, Partner Engineering and Science, Inc.
I’ll close with a message from Richard Davis, President and CEO, U.S. Bancorp, who drew an analogy between risk managers and the goalies in a soccer game in the sense that no one remembers the good they do, only the goals they let pass:
“Duration matters. The duration of this recovery matters. This has not been a robust recovery. It’s the end of a torturous recession. Yet, in the end, we are all safer today because of risk managers. They are exactly what we need at this time. Thank you for what you do.”