Toll Free 1-877-506-2744
How can we help?

Setting Up Risk Ratings

Print Friendly Version of this pagePrint Get a PDF version of this webpagePDF

In this article we will look at:

 

PrecisionLender allows for borrower risk rating categories to be mirrored after your internal risk rating scale with as few or as many required. You can set up Risk Ratings at the Product level in the Administration section. 

 

risk_rating.png

 

Risk Ratings for Commercial Loan Products

Important Note:

If you have Relationship Awareness, the Risk Rating names must be consistent throughout all commercial products

 

 commercial loan risk rating

Default

  • Risk Rating that is selected for this product when a lender creates a new loan.

Rating Name

  • Name that will show up for lenders and be used to identify this rating.

Target Return Adjustment

  • The Target Return will be adjusted by this amount when this Risk Rating is selected.

Category

  • Provides ability to group Ratings into specified categories.
  • Available categories to map Ratings are:
    • None
    • Pass
    • Internal Watch
    • Special Mention
    • Substandard
    • Doubtful

Usage Given Default

  • Applicable only to Lines of Credit and Letters of Credit.
  • For Line of Credit
    • Allows for estimation of the advance rate of a line of credit at the time of default.
  • For Letters of Credit
    • This option can be estimated by factoring the Usage Given Draw multiplied by the Probability of a Draw Occurring, where Usage Given Draw is likely to be high (100%), however, the likelihood is likely to be very low (5%) - the UGD would then be estimated at 5% (100% * 5%)

Origination Expense Factor

Servicing Expense Factor

Minimum Capital Allocation

  • One of the most critical elements in calculating Loan Profitability.
  • May be calibrated in a number ways in order to influence profitability targets based on the characteristics of the borrower and the lending opportunity.
  • A Minimum Capital Allocation setting is available at the Product and Risk Rating level in order to impose an absolute minimum at this cross-section in the event all other configuration options result in a Capital Allocation below a level believed to be acceptable for the characteristics of combined Product Type and Risk Rating.
Minimum Annual Loss
  • Annual Loss estimates are primarily configured in conjunction with specific Durations, which are explained below.
  • A Minimum Annual Loss setting is available at the Product and Risk Rating level in order to impose an absolute minimum at this cross-section in the event the calculated Annual Loss results in a level below what is believed to be acceptable for the characteristics of combined Product Type and Risk Rating.

Duration

  • Duration is a central concept to recognizing risk within PrecisionLender.  Annual Loss, Credit Capital, and Guarantor Factors are all configurable across multiple durations.
  • Each Duration period can be customized by either deleting a duration by clicking on the trash can, or adding a duration by clicking on the blue "Add Duration" button.
  • Our typical guidance to clients is to configure 12, 60 and 120 month durations. 
  • If set up this way, PrecisionLender calculates a monthly rate for each element of Annual Loss, Credit Capital, and Guarantor Factor in accordance with the term of the loan. 
    • For months 1 - 12:
      • The 12 month assumption is applied.
    • For Months 12 -60:
      • The monthly rate is interpolated.
    • For Months 60 -120:
      • The monthly rate is interpolated.
    • For Months Greater than 120:
      • The "For All" assumptions are applied.
  • A key component of our on-boarding process and ongoing support with our clients is to provide a consultative partnership to assist in analyzing a client’s operating environment and employ industry standard practices in order to arrive at meaningful assumptions for Annual Loss, Credit Capital, and Guarantor Factor stratified across Duration periods. 
  • Annual Loss
    • Expected loss on a loan given the risk characteristics of the loan and the Risk Rating.
    • Can be configured to reflect duration risk by calibrating against configurable duration assumptions.
    • The result of the Annual Loss assumptions will flow into the Profit & Loss statement for an individual loan profitability calculation as Loan Loss Reserve expense charge.
  • Credit Capital
  • Guarantor Factor
    • Impacts the total capital allocated to the profitability calculation of an Opportunity

 

 

Risk Ratings for Consumer Loan Products

Most of the Risk Rating fields for Commercial Loan Products are the same for Consumer Loan Products; however, there are a few that are different. Refer to the above section for the fields not listed here.

consumer loan risk rating

FICO Min

  • Minimum FICO score required to be in this Risk Rating

FICO Max

  • Maximum FICO score allowed to be in this Risk Rating

 

Creating New Risk Ratings

 

Insert PrecisionLender Standard Risk Ratings

PrecisionLender has a number of Standard Risk Ratings that are available to use as-is, or as a starting point to build your own.

  • Most Common Rating is 4 and Watch Rating is 5
  • Most Common Rating is 3 and Watch Rating is 5
  • Most Common Rating is 3 and Watch Rating is 4
  • Most Common Rating is 2 and Watch Rating is 3
  • Most Common Rating is 5 and Watch Rating is 6
  • Most Common Rating is 5 and Watch Rating is 7
  • Most Common Rating is 4 and Watch Rating is 6

From the Products Pane of the Administration Section, click on the name of the product that you wish to add or edit Risk Ratings types for.

 

Select_Product_-_Administration.png

 

Click "Edit" in the top left corner, and then click "Risk Ratings" in the menu at the top of the page.

 

Edit___Risk_Ratings.png

 

Click "Replace With...". Please note that following these steps will replace all of the risk ratings that are currently available with this product.

 

Replace_With.png

 

Select "Standard Set", which will show you a list of standard Risk Ratings. Click on the Risk Rating set you would like to populate with. 

 

replace_risk_ratings.PNG

 

All of the Risk Ratings will be replaced with the set you selected.

Remember to click "Save" at the top to keep the changes you have made.

 

Copy Risk Ratings From Another Product or Region

 

Once Risk Ratings have been created for one product, they can then be copied to other products. To start, from the Products Pane of the Administration Section, click on the name of the product that you wish to add or edit Risk Ratings types for.

 

Select_Product_-_Administration.png

 

Click "Edit" in the top left corner, and then click "Risk Ratings" in the menu at the top of the page.

 

Edit___Risk_Ratings.png

 

Click "Replace With...". Please note that following these steps will replace all of the risk ratings that are currently available with this product.

 

Replace_With.png

If you want to copy the Risk Ratings from a different product, you'll select "Other Products", and then select the product you want from the list that appears. 

 

replace_risk_ratings_-_different_product.PNG

 

If you want to copy the Risk Ratings from a different region of the same product, you'll select "Current Product", then select the product you're on, and when you click "Next" you will be able to choose which region's settings you want to copy.

 

Replace_Risk_Ratings_-_Region.PNG

 

Create Risk Ratings Manually

 

If you don't want to copy Risk Ratings from another product or region, you can create them manually. To start, from the Products Pane of the Administration Section, click on the name of the product that you wish to add or edit Risk Ratings types for.

 

Select_Product_-_Administration.png

 

Click "Edit" in the top left corner, and then click "Risk Ratings" in the menu at the top of the page.

 

Edit___Risk_Ratings.png

 

Click "Add New Risk Rating". 

 

Add_New_Risk_Rating.png

 

This will generate a new Risk Rating at the bottom of your list. From here, you can enter the settings for each Risk Rating, add multiple durations, or set a Risk Rating as Default. You can move the Risk Ratings up and down the list using the arrow icons (arrow_icons.PNG) and delete Risk Ratings using the trash can icon (trash_can.PNG). 

 

 

Related Articles

Was this article helpful?
Have more questions?