Credit risk remains the most significant challenge for credit unions in today’s economic environment. Rising delinquencies, charge-offs and economic uncertainty demand proactive strategies to safeguard financial stability, including a strong net worth. Below are the top ten items credit unions should prioritize: 

1. Strengthen Loan Underwriting Standards 

Credit unions must ensure underwriting criteria are robust, consistent and aligned with current economic realities. This may seem basic, however over time the credit union may have loosened underwriting standards, and the risk profile of borrowers may have changed to require a modification in lending standards. Examiners will scrutinize whether policies adequately assess borrower capacity and collateral values, especially for current high-risk segments like credit cards and used auto loans. 

2. Monitor Loan Portfolio Performance 

Delinquencies and net charge-offs have surged, particularly in credit card and indirect auto lending. Continuous monitoring of portfolio trends and early-warning indicators is essential to identify deteriorating credit quality before losses escalate. A third-party loan portfolio management system may be necessary to provide greater detail and identify potential credit risk trends. 

3. Maintain Adequate Allowance for Credit Losses (ACL) 

Credit unions must evaluate ACL reserves regularly to ensure they reflect current and expected credit conditions. The key question to address is whether current reserves and provisions adequately address projected future losses. The monitoring of the performance of the loan portfolio is a key item to assist in projected future losses. 

4. Manage Loan Concentration Risk 

Excessive exposure to specific loan types, such as used vehicles or commercial real estate, can amplify losses during downturns. The use of concentration limits and stress testing is helpful to mitigate systemic risk.  

5. Implement Comprehensive Credit Risk Policies 

Policies should define risk appetite, outline risk-based pricing and establish clear procedures for identifying and mitigating credit problems early. Integration with liquidity and interest rate risk policies is essential for holistic risk management. A written credit risk review policy that includes the following is key to successfully managing credit risk: 

• Qualifications and independence
• Frequency
• Scope and depth
• Review of findings
• Communication and distribution of results 

6. Leverage Data Analytics and Ongoing Monitoring 

Adopt advanced analytics to detect early signs of borrower stress and portfolio deterioration. Continuous monitoring helps credit unions respond proactively for changes in loan origination, whether related to increases in volume or changes in risk, such as increased lending to lower paper grade loans. 

7. Monitor Emerging Risks in Commercial Lending 

There has been concern related to commercial real estate, particularly office space, and certain industries like retail and healthcare. Regular reviews and proactive restructuring strategies are critical for these portfolios.  

8. Strengthen Third-Party Risk Management 

Outsourcing loan servicing or collections introduces additional risk. Credit unions must conduct thorough vendor due diligence, monitor performance and ensure compliance with regulatory standards. 

9. Enhance Collection and Recovery Programs 

Effective collection strategies, including early intervention and member assistance programs, can reduce charge-offs. A key item to address is whether the credit union has adequate staffing and resources to continue following prescribed collecting efforts with rising delinquency. Loan workout procedures should be well established for consistent application for all members.  

10. Address Economic and Inflationary Pressures 

Persistent inflation and higher interest rates are straining borrowers’ budgets, increasing default risk. Credit unions should incorporate macroeconomic stress scenarios into credit risk models and adjust lending policies accordingly. Addressing whether borrowers have repayment capacity even in stressed situations. 

Addressing these items listed above will put the credit union well on their way to an effective ongoing credit risk management system. Credit unions should not hesitate to invest in a robust credit risk management system, which can help to ultimately reduce loan losses for the long-term. Additionally, having an external review performed of your credit risks can be valuable in understanding areas that need heightened attention and accurately projecting any losses. Rely on Doeren Mayhew’s credit union pros to provide an in-depth review and position your credit union for long-term lending success.