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Lending Council Paper Explores Concentration Risk
Tuesday, April 19, 2016 6:35 AM

The CUNA Lending Council has produced a paper that outlines a process for evaluating credit union concentration risk. Authored by Bill Vogeny, senior executive vice president of lending and finance, Ent CU, the 11-page “financial flash” provides additional guidance on policy and tracking metrics, particularly as credit unions’ lending strategies evolve with the lending landscape.

Part of a solid concentration risk policy can and should include systematic monitoring of a variety of external metrics. This monitoring can help not only identify upcoming risk in the portfolio, it can provide a basis for developing risk evaluation scenarios. The following are some metrics the Colorado Springs-based credit union recently identified when updating its concentration risk policy for 2016-2021:

  • Median home prices and sales information for key mortgage markets. Average turn time (inventory of homes on the market/number of home sold in a month), trends in home inventory, and sales at different price points were also evaluated.
  • Home affordability. Using an index of median home price to median household income, Colorado Springs was measured against other mid-sized cities in the region including Omaha, Neb., Oklahoma City, and Albuquerque, Neb.
  • Manheim auction data for car sales. How well are certain used cars selling?
  • Credit bureau auto loan performance. How well are consumers repaying auto loans? Over the past several years, all lenders have benefited from incredibly high levels of auto loan credit quality and performance. Auto loan losses likely have nowhere to go but up.
  • Information on the manufacturer’s new car incentives. As an example, in 2006-07, incentives on full-size trucks and SUVs skyrocketed as gas prices increased. The incentives trickled down to negatively impact the values of older models.

There is no right or wrong way to measure risk and develop concentration limits; the key is to understand risk exposure and how the portfolio is unique compared with other credit unions, Vogeny wrote.

CUNA Lending Council members are eligible to receive complimentary copies of this and more than 300 other white papers and Financial Flashes.