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Leveraging Data Analytics to Identify, Manage, Measure, and Mitigate Risk
Thursday, February 18, 2016 6:30 AM


By Douglas White, Ser Technology

The business of credit unions is becoming increasingly complex, requiring increasingly sophisticated analysis and projections. As a case in point, the American Institute of CPAs (AICPA) is expected to issue a new pronouncement on how to record credit union losses. The “drop dead” date is not set yet, but credit unions will likely have to start using “Current Expected Credit Loss” (CECL – pronounced Cecil) by 2020.

CECL is expected to dramatically change the way credit unions are required to determine how much money should be in the Allowance for Loan Loss account and may affect the way credit unions account for investments. If and when the AICPA issues their pronouncement, expect NCUA and other regulatory agencies to issue their own guidance.

The point is, since the end of the Great Recession, credit unions have been bombarded with more stringent requirements for assessing and controlling risk. Often, data is stored in disparate systems, including the core processor, mortgage and Visa processors, as well as from third-party data providers such as credit bureaus and real estate valuation sources.  But many, if not most, credit unions are still attempting to analyze and manage data the old fashioned way, using multiple spreadsheets to piece together various data inputs, both internal and external.

In the case of CECL, the new standard will require credit unions to account for all contractual cash flows (interest and principal) that are not expected to be collected. This is going to require a lot of high-level math; regression analysis will likely have to be used to determine the probability of default on your loans. In virtually every case, credit unions will need to leverage analytic capabilities they do not have today.

The most important aspect of preparing for this change is making sure you have the necessary historical data that might influence this calculation, including things like credit scores and monthly charge-off and recovery data for every loan pool you have. And, CECL is not the only reason you need analytics. 

Key performance indicators and analytics help credit unions track and trend delinquency, charge-off, portfolio shift, loan quality, asset risk, predictive risk, loan pricing, and reserve for loan loss capital allocation. This type of “big data” methodology allows credit unions to identify the risk in each portfolio type, quantify the risk, and set appropriate key performance metrics for ongoing management purposes.

Monthly analytics and reporting can deliver updated information and metrics from the portfolio level down to the member level, and data can be imported into internal systems to manage collection, marketing, and lending activities. 

Enter the data warehouse, a data storage unit where information from various sources is consolidated into a single repository where it can be cleansed, managed, and analyzed.  Credit unions can effectively outsource the data warehousing function, or a data warehouse can be created internally. The choice to “make or buy” has everything to do with the complexity of the credit union, the internal competencies that exist to create and manage an internal initiative, and how much money the credit union is willing to invest in development. A credit union can build its own repository, or credit unions can effectively outsource the data warehousing function while still providing an accurate and timely reporting process to all stakeholders (including senior management, board members, respective business owners, and compliance staff) with access to monthly reporting.

As part of your technology strategy, each credit union will need to assess their own complexity and needs to determine what tools, processes, and competencies are necessary and appropriate to meet current and future needs.

Douglas White is executive vice president of Ser Technology Corporation, a technology development and service company that specializes in credit pre-approval marketing, consumer lending analysis, instant credit decisioning, and proprietary data encryption for over 2,700 credit unions in the U.S.  The company’s passion for excellence is reflected in their web-based ProAct software, which is gaining a solid reputation as being a leader in portfolio risk-management solutions. For more information, visit