Credit Union Exam Solutions Presents With Flying Colors

, Hey everyone.

This is mark Treichel with a, another
episode of, with flying colors.

I'm going to have a brief discussion
here on a potential compensation

regulation that may be coming
out and emphasis on the word.

May.

A real short update on governance and
pointing you towards some guidance out

there that you might want to check.

And then most of this episode
is going to be a classic rewind

episode from VIN Vieten of my team.

For those who have listened.

To this podcast for awhile.

You remember that van wrote
the commercial loan rule.

And this is a podcast we
did on rating credit risk on

commercial member business loans.

And we're seeing this being hit kind
of hard in some instances, from our

conversations with credit unions.

But first before we get to that.

I heard a rumor and I don't like to
pay attention to rumors, but as Stefan

Diggs, formerly of the Minnesota
Vikings and formerly of the Buffalo

bills, and now down with the Houston
Texans, I believe once said there's.

There's some level of truth to all rumors.

Anyway.

The rumor came from Twitter, also known
as X or formerly known as Twitter.

From a.

Kind of capital account and they said
a little mini scoop this evening.

Was this from a couple
of days ago, May 3rd.

A little mini scoop this evening.

OCC F H F a N N C way to announce proposal
curbing wall street pay as soon as Monday.

So the first question.

You might have, is wall street
pay that doesn't make sense.

Well, here's why it might make sense.

Back in 2020.

NCUA and the other banking regulators
proposed a compensation rule.

That was required by Dodd-Frank
and this rule was never finalized.

And I'm guessing that there's rumor is
that the Biden administration is pushing

the banking regulators to get this out.

It's long overdue from the.

Concept of the Dodd-Frank
act requiring it.

It's not, I'm not saying it's
long overdue saying it's needed.

I'm saying that the act required it.

So I believe they're dotting
their I's crossing their T's and

that's what this is referring to.

So I believe there is some truth to it.

Will it be Monday?

I don't know.

Will it be this week?

I don't know, but it's something
you should be watching for.

The other item I wanted to mention is
NCUA is hitting hard on governance.

Again, based on conversations.

I am having a, with many credit unions.

And it seems like anytime
anything is going wrong.

In a credit union is a business plan.

Is doubling down on governance and there,
I wanted to point out that, but also

wanted to point out that there is some.

Proposed guidance from the FDA.

Out there that our sister
podcast we'll be doing.

An episode on this proposed guidance from
FDA, and I've discussed this, read this.

This guidance is excellent guidance.

Hopefully Hopefully, you'll give a
listen to the other podcast and we

will have a podcast highlighting it
here in the coming weeks or months.

Some really good Summaries of what you
should have relative and what financial

institutions need relative to governance.

Now I will say in some instances, I think.

Is using governance as the catchall.

For interviews that they're
seeing in credit unions, and

sometimes they're raising it and
it makes sense sometimes there.

Raising it, it makes sense.

And sometimes I think they just
want to find from all of them.

And puffing to blame and the
governance card is the one day plate.

In any event, good corporate governance,
as better than I is very important.

This FBIC guidance.

Is good.

And we'll have more on that in the future.

All right, that's it for
the intro here and now.

Here comes our musical intro
followed by then beaten on

rating credit risk on commercial
business member, business loans.

Do you wanna maximize
your success with NCUA?

Join Mark Trico as he shares with
you the insider's view on passing

your exam with flying colors.

The With Flying Colors Podcast
is sponsored by Credit Union

Exam Solutions by Mark Trico.

If you would like to work directly with
the Credit Union Exam Solutions team and

receive support to optimize your results
with NCUA, so you save time and money,

visit us@marktrico.com to find out more.

Hey, this is Mark and we've got
another episode of With Flying Colors.

I'm thrilled to have Vin Vieten
here with me this morning.

Hey Vin, how are you today?

I'm great, Mark.

How are you doing?

I'm doing good.

Well, you've been on a couple other
episodes with Flying Colors and Vin

is a commercial lending guru, formerly
of NCOA and other places, but Vin,

could you kind of introduce yourself
for those listeners who may not

have listened to our previous chats?

Sure.

I was a commercial lender in New England
for a good 30 years where I worked

for, thanks to the nineties, there was
a lot of changes in bank ownership.

So I worked for a number of banks.

And exposed to a number of good credit
systems, including large regional banks.

So that was very helpful in developing
a knowledge for commercial lending.

Then I had the opportunity
to start two commercial loan

departments and two community banks.

So that was a lot of fun.

I've got to work with a lot of small
and medium sized businesses and learn

the importance of Providing a good,
valuable commercial lending service to

those businesses and because of their
importance in their local communities

between the economic activity they create
and also the employment they provide.

And then I had an opportunity to
go to work for 1 of my customers,

a large ready mix concrete company.

Those are the guys who deliver
concrete to the job sites.

He was located in 3 states,
he had about 300 employees.

So I got to get a feel for what
it's like to be a borrower because

I managed his banking relationships
and leasing relationships.

And that was again, what that
taught me again is how important

small business lending is as this,
as I said, this business had 300

people and he used to say, I have
to feed 300 families every week.

So it really does reinforce how important.

And rewarding actually to
provide commercial financing

at the right way to a business.

And then after that, I had an
opportunity to go to work as a regulator.

So I've now been a lender, a
borrower, and now a regulator

working for the NCOA, where I spent
the last 11 years of my career.

I retired in February of 2021.

While there, I was able to take
that experience as a lender.

In good and bad times a borrower,
but working for that ready concrete

company and get involved with providing
commercial lending the expertise

to the agency and to credit unions.

A couple of things I was involved
with that I really enjoyed at N.

C.

U.

A.

was working on the taxi situation
and helping to write guidance.

And then ultimately, I think the most
important contribution was the principal

author on the rewrite of the part
723, the commercial ending regulation.

So it was a lot of fun.

I felt very fortunate to end my career
having an influence actually nationwide

helping credit unions who I have a strong
affection for because of your purpose

of serving members and making sure
they get the best financial services.

Very good.

Yeah.

And as you said, you were the
principal author of NCUA's current

commercial lending rule, which was
more of a principal based rule.

We've talked about different parts of
that rule up until this point in time,

global cash flow being one of them.

But today's topic is going to
be rating credit risk, right?

Is that what we're
talking about today, Ben?

That's what we're talking
about today, Mark.

Rating credit risk.

Rating credit risk.

So going back to the regulation that
you were the principal author of, why

didn't make it a regulatory requirement
to have a credit risk as part of

policies and procedures at credit unions?

It was interesting, Mark, because when
we were writing the rule, we had had a

conversation with our regional lending
specialists to say, what do you think

the percentage of credit unions are
using a credit risk rating system?

And they said, probably a little over 50%.

Which reinforced that it's important
that we discuss and make it a requirement

to have a credit risk rating system.

Rating credit risk is a standard
practice accepted practice.

In managing commercial loan risk,
all the other regulators focus on

it and that's not the reason to do
it because other regulators do it.

But since it is the accepted
practice, and those of us who were

involved with commercial lending in
the past knew how important it was.

In monitoring risk.

Another reason why it made sense.

Is what we had noticed is sometimes
boards were not as informed as

they should be at the level of
risk in the commercial portfolio.

So, that just reinforced why it
was important that credit risk

rating system be put in places as
part of the new rewrite of 723.

We required the board to be reasonably
informed and a reasonably timely way

of the level of risk in the commercial
loan portfolio at the credit union.

I don't think there's any better
way and it is again, I'm going

to keep saying accepted practice.

It is the accepted practice in
the commercial ending world.

That you inform those responsible for the
risk in the department of the level of

risk through a credit risk rating system.

So, it only made sense that we felt
overall credit unions with over 50%.

And that was an anecdotal survey.

So, the science is there.

Let's do it, but since over 50 percent
had been using them, it probably was

the right thing to do to make sure there
was a common practice in the industry.

So it made sense to make sure that
all credit unions focused on that

and that it would help the board
fulfill its obligation to know the

level of risk in the portfolio.

So let's speak to what's in a
good credit risk rating system.

So we established the concept
that you should rate it, right?

You do an ABCDEFG, you
do high, medium, low.

Could you walk through how, what the
reg requires and like what the options

might be, because the regs are a little
less prescriptive in some areas, but

can you speak to what prescriptiveness
there is relative to how to do this?

As it relates to the regulation, I will,
but I want to make 1 more point mark.

If you don't mind to be effective, the
risk rating system should be accurate at

all times reason again, being reasonable.

If something happens with a borrow
and you don't hear about it for a few

weeks, and there's no way you could
have known that's fine, but each

credit should be rated at inception.

And then ongoing risk management through
site visits, regular submission of

financial information, annual review
of the credit and 3rd party reviews.

There should be additional
confirmation of.

The risk, and if the risk rating changes.

As a result, then that should be reported
to the board and I'll talk about this a

little bit later in the discussion, but
well applied accurate credit risk rating

system really ensures that all your
risk monitoring systems are in place.

Because, as I just said.

Initial underwriting has to
be thorough and comprehensive.

In order to be accurate, when
you 1st sign a risk rating, and

then again, that regular risk
monitoring has to be in place.

To ensure that the current
rating is accurate.

The ongoing risk monitoring.

You reminded me of my early days
at NCUA when I was an examiner,

then a problem case officer.

NCUA used to send people that they wanted
to learn about how to review commercial

loans to the School of Banking of the
South at Louisiana State University.

First time I had crawfish, we had
a crawfish boil on Sunday, they

flew in, you had the crawfish boil.

Monday morning, you met a gentleman
named Willie Stocks, S T A A T S, and

he was a professor of commercial lending
at the School of Banking of the South.

I remember Willie up in the front
of the class talking about when he

was a commercial lender and he had
to foreclose on a chicken farm.

There were chicken running all over the
place and they had to figure out how to

keep the chickens healthy, how to feed the
chickens, and he was contrasting that day.

The difference between making a car
loan, that you measure the risk on

the front end, other than making
sure that they have insurance.

It's not a high maintenance type
loan after you grant that loan.

And he was contrasting that
for the students the first day.

That this is not one and done.

It's not you approve it and you move on.

And so as you're explaining that
you're going to want to do the credit

risk rating, you're going to want to
understand it based on the financials.

And maybe it's low risk at one
point in time and stays that way,

but it might transition to another.

So I'll tell you a quick story.

I can remember back in the nineties
when the world was upside down and we

were very actively monitoring risk on
all accounts, I called one borrower.

Let's say a Wednesday 1 week
and had a conversation with him.

Everything seemed fine.

And then on Monday, when I was driving
to work that time, I was the bank

that was owned by a foreign concern.

So nobody was comfortable that they
had a job on my way to work on Monday.

I noticed that store that he
was a landlord of was empty.

And, of course, I panicked.

I just talked to him.

I should have known this was happening.

Well, anyway, I went screaming back to
the office and that was before the days

of texts and emails and everything else.

And I left them a message
and he called back a few days

later and he said, don't worry.

I told you I would pay you.

Don't worry about it.

But my tenant moved out.

So.

I felt better, but at the same time, I
quickly went in and downgraded it that

credit and put it on the watch list.

So had I ignored that, then I wasn't
responsibly monitoring the risk associated

with that credit and we got paid in full
and that's where character comes in.

He knew he owed the money.

He was going to pay it
whether he had income or not.

So from the property.

So that's the sort of thing
you need to recognize.

And a good lender is out there visiting
with their borrowers and a good lender.

You just develop a sense over time.

You can walk into a business and
just feel something's not right.

Especially I've always tell this story.

If you go into a business at 11
o'clock and the individual says,

Oh, everybody went for an early
lunch because nothing's happening.

Make sure you go back a week later
at two in the afternoon to see

if they're taking a late lunch.

And if they're taking a late lunch,
then it's time to have a conversation.

That might impact where you have
lunch and also your credit rating.

I'll tell you what, that was
the best source of new business

on the way back from lunch.

You're passing a customer or in this case,
a member that was a banker at the time.

Stop in and say, hi.

You're going to find out a little bit
about the business and also that's

when somebody says, you know, I've
been thinking about calling you.

Well, great.

Yeah, very good.

So, back to the regulation and what
it requires, what it doesn't request.

Let's talk a little bit about what
a credit risk rating system is, how

you might set it up, what the reg
requires, what options they might have.

I just dumped about 6 questions on
you, but feel free to tackle any

of them in any particular order
about credit risk rating system.

This podcast isn't to give you everything
you need to know about what a risk

rating systems, but just conceptually
talk about what you should be thinking

about and where you can go for some help.

But again, like we said, we wanted
the credit unions to know their risk

at all times and actually so that.

When the examiner came in, and ultimately
what we wanted was not examiners doing

a credit review, which was happening,
the examiners were reviewing credit as

if as a credit review person, and that
slowed down the examiners, they only got

through a few credits, and they had then
form opinion about the whole portfolio.

And the quality of the
portfolio based on that.

So if they've pulled 2 or 3 credits that
they felt was, were not well underwritten.

Well, then the examiner applied
that opinion to the rest of

the portfolio, because that's
the only information they had.

So, ultimately, what this transition
to requiring credit risk grading.

Is to put the burden and
aggressive way, but put the

burden of knowing the credit risk.

On the credit union and the board of the
credit union, and as I said earlier, if

you have a good credit rating system.

Then you probably have all the
other policies and procedures are

probably in good shape and will
support the credit risk rating.

So that instead of reviewing credits.

The examiner will come in and evaluate the
accuracy of the credit risk rating system.

So they're going to say, okay, this
credit's rated, let's say a 3 and then

they're going to read your policy.

What makes up a 3.

And then review your underwriting and risk
monitoring to see if they agree or not.

And there was an old rule of
thumb that generally what the

other regulators do is evaluate.

Credit risk grades and, you know, you
want to be less than 5 percent of those

that are reviewed changing and that
can be changed in either direction

in an up direction of you've upgraded
the credit or downgraded to credit.

So clarify that you don't
want a change of more than 5%.

Yeah, they are.

What?

So how they looked at?

Well, let me do it with a easy
number because I can't do math

on small numbers of 100 credits.

You wouldn't want 5 of those credit
ratings changed by the examiner,

meaning changed by the examiner.

Got the examiner saying, I disagree
either because your rating system is odd.

Or it says that you would downgrade
in these scenarios and you did not.

Right.

And even up in often you hear, and I'm
going off on a tangent a little bit,

often you hear is, well, we're really
conservative, so we don't upgrade.

What we're talking about
is we want accurate grades.

They should be accurate
and being conservative.

It can indicate also that
you're shortcutting it.

It's easier just to keep it at a lower
grade than do the work to upgrade it.

You really need to make sure
they're accurate because ultimately

what you should be doing also is
analytics on the migration and

trends of your credit risk grades.

In your portfolio, obviously, if they're
all moving to a lower level, and we'll

talk about that in a minute, then you
want to address whatever is causing

that in policies or even personnel.

And if it's upgrading, well, the
borrower should get the benefit of that.

And also, so should you in your portfolio.

I know you asked earlier about what
should be in a credit risk rating system.

I do suggest that everybody read
the examiner's guide on credit

risk ratings because that will
give you a real good idea of what

the expectations of the agency are
regarding credit risk rating system.

And often what you do see is a matrix.

I'm from the old school.

That I like to see definitions that
make sense for each credit grade.

So let's say you have an 8th grade system.

1 should be defined to have these
characteristics of 234 and just go down.

But what's really important is that.

There's qualitative and quantitative
evaluation and a matrix is

very good for quantitative.

That would be leveraged debt service
coverage, that sort of thing.

But the qualitative is how
good is that management?

Is there some competition coming in?

That could impact this credit is that
they just lose their top salesman who

had been producing all the business.

So I personally believe that the
quantitative is the easy part.

It's that qualitative.

And that's where your
skills as a lender come in.

And so there should be.

In defining these risk rates,
some comment on the qualitative

issues that should be considered.

And so then if you use strictly
a matrix to arrive at a rating,

there's ways of using the qualitative
process, certain risk management,

your rate management, your rate
market position, that sort of thing.

But a lender should also have the
flexibility to say, I know this rates as

a 3, but I'm going to make it a 4 because
of whatever the following reasons are.

So it's sort of like a picture, paint
the picture, then take a stand back

and take a look at it and adjust
it the way you think it should be.

Just be able to support the reasons
you may be downgrading it or upgrading

it based on what a definition may be.

So a top grade would be what?

A top grade.

Number one, usually it's cash secured.

What would it be called?

A risk rating one.

Okay.

That was spreading.

What?

And the general numbers are
used, but you can use letters.

You can some kind of ordinal system that
progresses through the level of risk.

And typically do you see one
through what would be the worst?

I think what you find for credit
unions, seven to eight ratings.

With 1 through 4 being past ratings,
meaning good quality credits, but you

want granularity even in your past
grades so that if there's progression

of downgrades, meaning all of a sudden
a 2 is a 3 and you've got 3s moving to

4, you can pick up those trends earlier.

So it's important to have
granularity in the past grades.

I used to think maybe you only really need
1, but I've changed my opinion on that.

That progression is very important and
with analytics available these days.

It's even more important because
you can really drill down on that

and then that's the past grades and
then there's the adversely rated.

And generally what we suggest,
because NCUA talks about what the

system should have, it doesn't
specifically say this is what you

should do, or this, use this system.

However, the adversely classified,
those credits that are not strong, the

best way, in my opinion, To manage that
is follow the regulatory risk grades

of substandard, doubtful and loss.

I was wondering that relates back
to when I looked at loans a long

time ago, and the 1st commercial
lending rule that went in place.

Gosh, 87, 88.

Right piggyback off what
the bankers had created.

Substantial losses.

It's a proven system.

There's plenty of support for it, which
we'll talk about in a minute unless

you can come up with a better one.

And I don't think I've ever
seen a better 1 because most

credit unions use that standard.

And although the, it's not stated
clearly in the guidance that

that's an acceptable way to do it.

It does indicate that's a good way to go.

So we've got 1 through 4
and we just did 6 through 8.

And then is that 5?

What is that?

And although watch list is
not technically risk grade, it

generally falls in that 4 to 5 area.

And what a watch list is, obviously,
there's a, you've got a credit,

something's happening with that
credit or customer borrower.

And where the rating could change or
move most likely in an adverse direction

and you just want to keep an eye on it.

Generally, that's called the transition
rating and always used to use.

Something's going to happen
within the next 6 months, but

that's not carved in stone.

So you've got your risk rating there.

And when it slips into that
category, is the credit union

reevaluating it more frequently?

You kind of like when your camel go
goes from a two to a three, you're

going to see NCOA every six months.

When a camel code goes from a
three to a four, you're going

to see them every four months.

Yeah.

A borrower slips to a five.

What does that mean relative to the
level of effort that it's going to take

for the credit union to watch that?

Sure, and we're using 5 as an
example in this discussion, right?

Example only, not required.

And the answer to that, Mark, is yes.

You're going to be looking
at it more often because

you've identified some issue.

Either they've lost a big customer,
there's new competition in town.

There's a list of things, but you
want to see how the business responds.

To whatever this issue may be, I was
going to say threat, but that's a

strong word, but something that may
have an impact on their business.

And yes, you'll probably
visit them more often.

And along with that, when there's a watch
list, you should have a plan associated

with how you are going to monitor it.

So there should be a plan.

How often are you going to
collect financial information?

How often are you going
to visit the borrower?

And what may cause it to be
downgraded to a lower risk rate.

Got it.

So we talked about adverse
credits relative to credit risk.

What would you like to speak to next, Ben?

I just wanted to go over a few
real important things that the

agency identifies as important to
be involved with, but be part of

the credit risk grading system.

It should be dynamic.

We've mentioned this already, but if
there's a change in that credit in a

reasonable amount of time, The, the
lender needs to recognize that and what

that reasonable amount of time is not an
exact time, but considering the complexity

of the credit, the risks of the credit
that should determine how quickly you

should be identifying those issues.

So that's really, really important that.

The response is, well, we haven't seen
him in three months, so how would we know?

That's really not a good answer.

You should know your credits well
enough to know who you have to

see more often than three months,
and then every three months.

The other reason, and when we're writing
the rule, it really hit us, being in the

member service business, how important
it is to know the level of risk.

Because we're in business for that
individual sitting across from the

desk, meaning the borrower, the
member borrower, commercial borrower.

And if you have an accurate
risk grade, it means that you're

actively monitoring the account.

And if you see a issue developing
early that could impact the business,

you're really providing a great
service to that borrower to let them

know we have some concerns here.

And develop a relationship where
you can say that telling somebody

something negative about their
business is really important.

And I've said this before,
but I'll say it again.

I think the best service that
a commercial lender provides.

To their bar or at least once a
year, they get a full financial

review of their business for free.

Well, they're paying an interest rate,
but no direct charge of their business.

And so develop that rapport with your
bar or that they respect your opinion.

And in a respectful way, discuss those
things that could impact their business

and are important to their business.

So with the credit risk rating
system, maintaining that and

keeping it up to date and accurate.

Again, you're visiting that borrower,
you know, what's going on and you can

share your financial expertise with them.

If you see some trends that
are of concern, the earlier you

get them, the easier the fix.

Sure.

So trends in credit ratings.

One of the things that NCOA.

And credit unions always are wondering
how NCUA is going to approach it.

It relates to the allowance for loan loss
and lease loss, the ALLL, and how that

relates to the commercial loans and how
that rates to the credit risk rating.

Is there anything you can share with
the listener relative to how these

credit risk ratings can play into
the ultimately to the financials

and there's any best practices that
you might suggest in that regard?

This is not my strongest area, the
accounting behind these things, but

I know when I use a common sense of
what's doubtful, what's substandard.

So when you're setting those reserves
and I'm not a CECL expert and how

it'll apply there, obviously, if you're
going to look at the buckets and see

where the risks are and hopefully.

Be very assigned proper amount of
reserves for each of those buckets.

And at the same time, as you get
further into it, maybe you're

going to be looking more for
specific reserves to those credits.

Doubtful and lost, you've identified
all of those and obviously it's in

order to set the proper reserve.

You need to know the risk.

How can you know the risk of the overall
portfolio and individual credits,

unless you have some way to rate it?

Sure.

Well, so going back to the contrast
between seven column and the systems

that were in place when you started
in commercial ending and where it

was at when you were last doing it
and then helping it, and there's

MIS systems out there, there's QCIS
out there that can cull data, every

element so that you can analyze those.

Quantitative side of things, the
ability to analyze that quantitative

has gotten better, but still, as
you said earlier, it comes down

to the qualitative side of that.

You need to understand what those
numbers mean, but over your career,

were there aha moments relative to wow,
now that we can actually track this

quantitative number, it makes things.

Easier or better?

That's a good question, Mark.

And I probably won't answer
it exactly as you asked it.

Go for it.

Yeah.

Answer it in any way
that makes sense to you.

And because what we do notice, this is
where commercial ending is different.

When you get into analytics of a consumer
portfolio, you got loan to value, you got

credit scores and praise values, which
you can adjust in the overall portfolio to

find out what bucket they fit in for risk.

But with commercial lending, and
this is what I always liked about

commercial lending, you actually
know, not that's guessing at the

risk, but estimate the risk based
on that use and portfolio analytics.

I support wholly.

It's a great process.

And the only way you're going to
be able to manage the risk in a

consumer portfolio, but here's
the beauty of commercial lending.

You actually know the risk of each credit.

And then that's why I
used to get in trouble.

I used to say on speaking events, I
think commercial lending is the safest

lending you can do because you know
the level of risk with the borrower.

You have proper covenants.

You can take actions to help the borrower.

I know to look at covenants as a way to
take an aggressive action against the

borrower, but it gives you some leverage
to sit down with the borrower and help

them make the changes in their business.

So with that said, now you can take
the debt service coverage ratio

leverage and everything else and
put that into the MIS systems.

Unless.

There's a consistent way to
look at each one of those.

The quality of that input is only
good as the quality of the lender.

So it's not always accurate to
say, all right, anything with

that service coverage of under 1.

15 or over 1.

25, it all depends on
how they looked at it.

How did you get there?

Yeah, but with credit risk grading,
it's supported by the analysis.

So that reviewer that goes in there
is going to double check it and

say, so if you're really looking
at just migration of credit risk.

Hopefully all that underneath the
underwriting, the monitoring and all

that stuff supports that risk rating.

So the risk rating itself tells you a lot.

Got it.

So I wrote down covenants too.

That might be something then we can
talk offline on this, but that might be.

An actual podcast that talk about what are
your favorite covenants that you've seen?

What's the goal of certain covenants?

Yeah, I think that'd be a good one.

It's just time to do a deep dive, maybe
a shorter podcast on that particular

topic, but put that in your notes to
remind me that we'll be down the road.

I will.

Yeah, that's a good idea.

Yeah.

And then so credit union wants to
improve their credit risk rating.

They listen to this or it's somebody
who's getting thinking about getting

new into commercial What resources would
you recommend that they take a look at?

Well, there's four.

Look at the preamble to the
rules and what it says about it.

What the part that's MBL
commercial ending rule part 723.

Look at what the rule
specifically says about it.

That's one.

Two would be the examiner's guide on
rating credit risk or credit risk rating.

And then there's two other
really, really good resources.

One is the interagency
guidance on credit risk review.

We, when I say we, I mean, the agency NCOA
was part of the group, the interagency

group that wrote that guidance.

And it does a really
good job of discussing.

How to use credit risk rating
system, how credit review should use

credit risk rating system, how that
should be reported to the board.

So what appropriate components
should be and independence of

assigning those risk ratings.

So that's an excellent piece of guidance.

And there's a preamble
that goes with that too.

It's always worth it.

I mean, the stuff can
maybe put you to sleep.

If you read through it, at least you'll
say, yeah, I know where to look for that.

And when you have a question down
the road or know where to look.

When you're writing your
policy and your process.

And then the Bible for rating credit risk.

Is the OCC handbook on rating credit risk.

Your question earlier, Mark,
about what I've seen change in it.

But I found interesting
when I looked up the OCC's.

Handbook on rating credit
risk was written in 2001.

Wow.

So, as I say, it's an accepted practice.

Only, but it's a goodie.

Yeah, they haven't been
able to improve on that.

That says a lot.

That would be a great resources for.

Right.

And what that will tell you is, I
mean, I just read off some of the table

contents, but these sections are really
important functions of a credit rating

system, expectations, the development
of the risk rating system, the risk

rating process, examining risk ratings.

Rating credit risk, and then the
credit risk evaluation process, which

includes financial statement analysis,
other repayment sources, quantity.

So it's just an excellent guide.

And beyond just rating credit risk, but
commercial loan risk management process.

Very good.

Any last thoughts here
before we wrap it up?

And I get one more Willie Stotts
reference from my LSU days of

school banking of the South.

Again, managing risk.

And I just want to say,
cause I get on my soapbox.

If you manage risk correctly.

Not only does the credit union benefit
by obviously having a stronger portfolio

and less adverse effects from having
a poor portfolio, which means losses

again, the 1 of benefits the most,
if you really care about what you're

doing is the borrower because you
again, I'm going to talk about lender

is a financial expert and you're the
financial expert on financing a business.

A fully informed lender can then structure
the best credit package for that borrower.

And if you look at it that way,
you're going to be sure to get all

the information you need to make
sure that you're recommending the

right solution for that borrower.

Very good.

Well, and so then on that covenants
future podcast, I'm going to

connect that to my reference to
the school of banking of the south.

When I was down there learning from
some experiences that they had had

the teachers and Willie Stott's
in particular, it had relative to

commercial loans that had gone bad.

He told a joke about the fact
that you need to control the

draws on a commercial loan.

That you need to make sure
that you do inspections.

And if you're giving them 10 percent
to do X, Y, and Z, that you make

sure that you have covenants in place
and that you do different reviews.

And his joke was a
commercial loan gone bad.

Would allow people to take that
first draw and purchase a boat.

And so they would take it
and it would all be profit.

The commercial construction
people would get their profits.

And he said down in Louisiana at the
time, the most common name for boats of

people in the construction business was.

First draw that they took
and they bought their boat.

That's not how you want to do commercial.

And sometimes you can learn
from more stories from that.

And I referred back to
this class where I learned.

A lot of things early on in
my career again, and, you

know, so much more than that.

You went into a much deeper level, but.

Let's slot that.

We'll talk about a covenants
on a future podcast, Vin.

I want to thank you for your time
today for those listeners out there.

I want to thank you for your
time and hopefully we'll see you

again or you'll hear us again.

This is Mark Treichel signing
off for With Flying Colors.

Thank you for joining us on this episode
of with flying colors, subscribe on

your favorite podcast app to hear future
episodes where subject matter experts

of all varieties will provide tips
on how to achieve success with NCUA.

If you would like to learn more about
how we assist credit unions, check

out our services at marktreichel.

com.