FAS 114 Loan Portfolio Review and Stress Testing Software 

• Introduction
• Loan Grader at Work
  • Classifying and Quantifying Risk
  • Shortening Audit Time
  • Calculating Specific Loss Reserve
  • Stress Testing Your Portfolio
• The Loan Grade Process
• Implementation and Customer Support

While everyone recognizes the value of periodic loan portfolio review, it is unlikely that it ranks among your favorite tasks. Under the best of conditions, a portfolio review diverts time and resources from your primary objective generating new revenue, earning assets for your institution. In other instances, external review of even a small sampling of your portfolio can not only be expensive but can disrupt the normal routines of your professional staff. These may be minor inconveniences compared to the negative financial effects and acute embarrassment of bad loan surprises, but haven't you found yourself wishing for a better way to meet your fiduciary obligations?

Financial Account Standards Board (FASB) Statements FAS 5, FAS 114, and FAS 157 require that the measurement method be applied on a loan-by-loan basis, when feasible, and that it be applied consistently across your portfolio, using verifiable fair market valuation data. Achieving this ideal -- a 100% portfolio review using consistent review criteria -- is possible only when you use an automated process.

The need for portfolio level stress testing and its use as a risk management tool is reinforced in letters jointly issued by the FDIC (FIL-104-2006), the Office of the Comptroller of the Currency (Docket No. 06-01), the Office of Thrift Supervision (No. 2006-01), & the Federal Reserve System (Docket No. OP-1248) titled Concentrations In Commercial Real Estate Lending. Stress testing should quantify the impact of changing economic scenarios on asset quality, earnings, and capital. Stress testing is achieved by considering possible future negative scenarios and imposing them on your current portfolio to reveal how they impact the health of your portfolio.

Loan Grader is a turnkey portfolio management tool that will enable your institution to meet its FASB-dictated loan review and stress testing obligations with incredible accuracy and amazing speed and efficiency.

Loan Grader at Work (back to top)

Developed by Lowenstein and Associates PC, a licensed CPA firm and leader in financial industry software development since 1986, Loan Grader is used by financial institutions throughout the United Stated for installment, mortgage, and commercial loan portfolio reviews. Here are some of the ways Loan Grader is helping your peers in quantifying portfolio risk while improving staff productivity and reducing examination expenses:

Classifying and Quantifying Loan Risk by Performing a 100% Loan Portfolio Review -- Using labor-intensive, subjective sample methods to estimate a loan loss reserve is often inconsistent and inaccurate. Loan Grader uses your institution's loan review policy (converted to programmatic "rules") and a variety of data sources determine the probability of individual loan repayment and quantify the credit’s risk. Most of the data used is already resident within your institution. Loan Grader recognizes that different types of loans have different types of inherent risk. With Loan Grader, you tailor your rules to specific portfolio risks and then apply these rules consistently on a loan-by-loan basis. By modifying the rules and assumptions you can easily stress test the portfolio’s valuation under mild, moderate and severe stress testing "what-if" scenarios. Impaired loans are identified, along with technical exceptions, various "alert" lists of loans meeting various qualitative and quantitative criteria, pass loans, watch lists, and much more information is a natural by-product of performing a 100% loan review.

And what if your rules must be adapted to criteria submitted by the Fed, your auditor, or an examiner? With Loan Grader, your rules may be modified, and your portfolio re-graded, on demand -- yielding clear and accurate reporting while reducing the potential for one of those unpleasant "surprises."

Shortening Audit Time -- Audits and examinations can take inordinate amounts of time, money and staff resources. Besides the out-of-pocket dollars, there is the cost of missed opportunities as staff resources are expended supporting audits and examinations instead of making loans. With Loan Grader, your portfolio is reviewed, valuations are calculated, and board reports are produced in hours, not days or weeks. That means Loan Grader pays for itself immediately, and then over and over again as you continue its use.

As examiners accept Loan Grader as a strong internal control, the length and expense of examinations are reduced, while file integrity and collateral documentation are preserved.

Calculating Your ALLL (Allowance for Loan and Lease Losses) -- Loan Grader satisfies the requirements for identifying impaired loans and calculating the level of impairment, using one of the three required impairment valuation methods. General and specific loan reserve allowances are also calculated for non-impaired credits. By classifying and quantifying risk, Loan Grader provides a clear picture of your loan portfolio quality. Loan Grader dynamically builds your homogenous loan pools with loans of similar characteristics and risks. Estimates of losses are calculated by combining actual historical loss data with reasonable expectations of future losses based on ever-changing environments and circumstances.

Stress Testing Your Portfolio -- Once the Loan Review and ALLL calculation process is established, portfolio stress testing becomes an easy task. Modify rules and valuation factors to build mild, moderate and severe "stress" environments which reflect possible events in the future. The more likely the events are to happen, the more realistic the stress test reflects future portfolio risk.

Implementation and Customer Support (back to top) 

The simplicity and Loan Grader is incredible. You become immediately productive as Lowenstein and Associates delivers a turn-key solution. Their 15-plus years of expertise in loan review is built into the product based on customized consulting and blue-printing of your lending operation, loan review policy, and an understanding of your institution’s lending programs, policies and procedures. The entire loan grading process is accomplished with the press of a single button, GRADE LOANS!

And Loan Grader is as easy to implement, as it is to use. Full implementation can be accomplished in less than 30 days. Lowenstein and Associates personnel will gather your institution's unique loan review criteria and portfolio information. If you are not satisfied with your current grading rules, Lowenstein and Associates will use their knowledge and experience to create new rules for you, deriving them from the American Institute of Certified Public Accountants (AICPA) publication Auditing the Allowance for Credit Losses of Banks . Then Loan Grader will be tested with your core loan system loan data before it is brought to your site for a day of product implementation and staff training. Once you're up and running, Lowenstein and Associates will provide full product/functionality support and maintain the Core System-to-Loan Grader data.

Contact us for an online, real-time demonstration.

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