Credit Risk Management - Deposit Insurance Corporation of Ontario

Credit Risk Management Chapter 5 Reference Manual – Spring 2005 Page 5-1 Credit Risk Management Section Topic Page 5000 Executive Summary………………………...………………... 5-2 5100 Legislative Summary…………………………………………. 5-3 5200 Policy…………………………………………………………… 5-9 5201 Credit Management Philosophy…………………………….. 5-10 5202 Authorized Credit Instruments………………………………. 5-11 5203 Loan Volumes, Portfolio Mix and Industry Classification…. 5-19 5204 Volume Restrictions on High Risk Loans…………………... 5-21 5205 Connected, Restricted Party and Staff Loans……………... 5-22 5206 Lender Approval Limits………………………………………. 5-24 5207 Lending Criteria……………………………………….………. 5-25 5208 Loan Process………………………………………….………. 5-26 5209 Securing Loans……………………………………….………. 5-27 5210 Delinquent and Impaired Loans…………………………….. 5-28 5211 Loan Rewrites and Restructures……………………………. 5-29 5300 Planning………………………………………………………... 5-32 5400 Risk Measurement and Board Reporting…………………... 5-33 5401 Portfolio Mix, Volume and Yields……………………………. 5-37 5402 Credit Risk Ratings and Watchlist…………………………... 5-39 5403 Delinquent, Impaired

and Formally Restructured Loans…. 5-41 5404 Connected, Restricted Party and Large Loans……………. 5-42 5405 Rewritten, Restructured and Consolidated Loans………… 5-43 5406 Loan Monitoring……………………………………………….. 5-44 5500 Risk Management…………………………………………….. 5-48 5501 Qualified and Competent Lenders………………………….. 5-49 5502 Loan Approvals and Disbursements Process……………... 5-53 5503 Loan Documentation…………………………………………. 5-55 5504 Credit Investigation and Analysis…………………………… 5-59 5505 Loan Security………………………………………………….. 5-67 5506 Loan Renewals………………………………………………... 5-79 5507 Collection of Delinquent Loans……………………………… 5-81 5508 Use of Real Estate Appraisers………………………………. 5-86 5509 Use of Lawyers for Mortgage Transactions……………….. 5-87 Credit Risk Management – Executive Summary Section 5000 Reference Manual – Spring 2005 Page 5-2 Executive Summary Sound credit management is a prerequisite for a financial institution’s stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. The prudent management of credit risk can minimize operational risk while securing reasonable returns. Ensuring lending staff comply with the credit union's lending licence and by-laws is the first step in managing risk. The second step is to ensure board approved policies exist to limit or manage other areas of credit risk, such as syndicated and brokered loans, and the concentration of lending to individuals and their connected parties (companies, partnerships or relatives). The board and management should also set goals or targets for their loan portfolio mix, as part of their annual planning process. The loan portfolio should be monitored on an ongoing basis, to determine if performance meets the board's expectations, and the level of risk remains within acceptable limits. Standardized lending procedures should be adopted to reduce risk of transactional error, and ensure compliance with regulatory requirements and board policy. Approval and disbursements, documentation, lending staff and loan security are just some of the procedures recommended in this chapter. A credit union can meet standards of sound business and financial practices by ensuring it has developed and implemented credit policies, risk and performance measurement techniques, and risk management procedures comparable to those contained in this chapter. Policies, measurement techniques and procedures should be appropriate for the size Credit Risk Management – Legislative Summary Section 5100 Reference Manual – Spring 2005 Page 5-3 Legislative Summary Management and lending staff should be apprised of the comprehensive lending legislation set out in the Act and Regulation 76/95, as well as relevant legislation in other Acts. Members of the board should also be familiar with the major aspects of lending legislation. Referring to or repeating...

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