Advice

The Silver Lining of Charge-Offs

Posted on June 1, 2024 Published by

In the lending business, charge-offs are an inevitable reality. They can occur for a multitude of reasons: economic downturns, deficient underwriting, natural disasters, fraud, or inadequate collections. Despite their negative connotation, charge-offs can present an opportunity for financial institutions to recalibrate and improve their risk management efforts.

Charge-offs aren’t generally something you would like to discuss for more than you need to. But by stepping back and thoroughly reviewing the charge-off, financial institutions can gain valuable insights into optimizing credit risk management. Here are several strategies that financial institutions can implement based on these insights:

  • Revise Loan Structures and Monitoring: Adjusting the terms and conditions of loans or enhancing monitoring processes can help identify potential issues earlier and mitigate risks.
  • Modify Underwriting Policies and Procedures: Strengthening underwriting standards can prevent future bad loans by ensuring a more rigorous assessment of borrowers’ creditworthiness.
  • Enhance Fraud Controls Implementing more robust fraud detection and prevention measures can protect against fraudulent activities that lead to charge-offs.
  • Improve Collection Efforts: Developing more effective collection strategies can increase recovery rates on delinquent loans, reducing the need for charge-offs.
  • Strategic Market Decisions: Choosing not to lend in high-risk markets or industries can reduce exposure to potential defaults.

An honest and thorough assessment of a charge off and sharing the experiences as a team can significantly reduce risk and improve the resilience of any financial institution. By learning from past charge-offs, institutions can develop stronger, more effective lending practices that contribute to long-term stability and profitability. Interested in learning about what we call “spilled milk” examples?  Use this link to reach out and learn more about Enlighten Financial here.

 

Tags: ,

Comments are closed here.

“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors.”
— Bill Beardsley, President, Michigan Business Connection
“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors."
— Bill Beardsley, President, Michigan Business Connection