Earlier this year, the Consumer Financial Protection Bureau published some “supervisory observations” based on its vision of the implementation of the Fair Credit Reporting Act. One area with respect to which the CFPB expressed concern was “data accuracy.” Specifically, the CFPB observed that, generally, credit reporting companies (CRCs) had less-than-ideal data governance policies, procedures, and practices.
One data accuracy issue involves the level of certainty that one requires regarding identification of a consumer before including information on that consumer’s report. The CRCs aggregate information from myriad sources, and those sources have varying standards and formats for the information they provide. The CRCs sought to screen the information they received to identify consumers, but instances did occur where inaccurate information was included on some consumer reports.
Consider a credit report concerning John Q. Publik. Imagine that the state where Mr. Publik resides provides civil judgment information, but the state does not report middle initials. What should a CRC do with data that identifies “John Publik” and otherwise appears consistent with other known information about John Q. Publik – include it or not? Imagine that the tax authorities provide tax lien information, but there are 50 John Q. Publiks in the database. Again, what should a CRC do with data that identifies “John Q. Publik” and otherwise appears consistent with other known information about a particular John Q. Publik – include it or not?
The bar is being raised for the level of certainty that CRCs will be expected to have before they include information on consumer reports. One near-term effect of this change is that CRCs will remove information currently being reported, including civil judgment and tax liens, that does not satisfy enhanced standards for positive identification of the debtor. Likewise, going forward, CRCs will not include new information that does not satisfy enhanced standards for positive identification of the debtor. On one hand, the accuracy of some credit reports could be improved because there will be fewer “false positives”: liens or judgments reported as affecting a consumer other than the consumer to which they really apply. On the other hand, the completeness of credit reports will be diminished because there may be more “false negatives”: liens or judgments that do affect a consumer but which are nonetheless not reported because the identifying information was not robust enough for the CRC confidently to include the information.
Creditors and other users of credit reports should consider augmenting their due diligence by obtaining judgment and tax lien searches from a trusted source – understanding that the CRCs may leave a gap.
When looking to uncover civil judgments, request searches at the court database in the county [or counties] indicated as the consumer’s recent and previous residences. Also, if you are concerned about any liens filed against particular real estate, request a property search in the county where the real estate is located. Lastly, you can request searches for judgments in the federal district indicated as the consumer’s recent and previous residences.
When trying to find tax liens, request searches to be performed at the centralized tax lien database in the state [or states] indicated as the consumer’s recent and previous residences. This search reveals tax liens on personal property assets, analogous to a UCC‑type security interest. Again, if you are concerned about particular real estate, be sure to order a search where the property is situated. This search reveals tax liens that may be recorded on real property.
The stated roll-out for the changes to the credit reports is on July 1, 2017, but it is likely that some reports are changing already. Do not delay in updating your due diligence practices!
Start by establishing a concentration baseline through peer analysis to know where you stand.  Be sure to include acquisition development and construction loans as well if applicable.  Next, establish policies and procedures for management and members of the board.  Like any regulatory compliance initiatives, a strategic plan and approach is critical with information being shared top-down throughout the organization.
Assessing the market to understand what you’re operating in in terms of a relative risk profile would be best.  For management practices, rank each concentration bucket by its risk.  The better you understand your market sectors in regards to economic, job generation, and when real estate is up or down the better you can relay explanations to your regulators.  If over the 100% rule just know that brings enhanced regulatory scrutiny so your understanding and solid documentation can help.
A good best practice would be to create a Risk Appetite Statement for your concentrations.  Make sure management and the board understands the risk appetite and that it is appropriately reflected in the meeting minutes.  Regulators want to know scenario and stress testing tied to ALLL and capital is continuously being conducted by your bank.  Project past to substandard based on rate change tests.  Conduct stress test changes in cap rates.  What is the effect on valuation?  If default what losses?  Also, try to diversify your collateral.
Concentration Reports can and should be made by asset category.  If your bank’s caps are being exceeded then action must be taken immediately.  In addition to dollar amounts it’s wise to have an understanding of the trends in each of your asset groups (ie occupancy, rents, who is entering/ exiting).  Set house-level limits vs. legal-level limits with a buffer to ensure you achieve a sound position.  If able, additional levels of capital should be recognized and set aside.
It is recommended that you review the SR 07-1 Guidance on Concentrations in Commercial Real Estate along with taking some of the suggested actions above



  • Growth is slower than anticipated

  • The labor market is steady

  • Job growth performing well regardless of news reports

Apartment Market

  • Vacancy rates are falling

  • The data says construction is outpacing demand

  • There are record high rents across the country & not slowing down

  • There are far more “A” properties being built than “B/C” properties

  • Strong markets include Atlanta, Seattle, Bay Area, Washington D.C., Houston

Office Market

  • Not as robust as it should be, but still performing well

  • There has been a decline in vacancies

  • Rent growth is strong

  • Renewed attraction to urban areas

  • Companies are bringing suburb offices back to the cities


  • Multi-speed recovery

  • Internet making the retail brick & mortar market hard

  • Discount stores are performing well (T.J. Maxx, Trader Joes)


  • Improving

  • E-commerce is booming

  • Rent is growing

  • Distribution markets are hot, hot right now

Capital Markets

  • Outstanding debt growth

  • Commercial banking very strong

  • More regulation than ever before

  • Now very global including China, Japan, etc.

Choosing Your Credit Culture

Credit Culture and Corporate Culture are very closely tied.  As both evolve they must continually be well established, communicated, and enforced.  In properly doing so your organization’s credit risk appetite should be made to align with your organization’s values.

Your Front Line

Relationship Managers are your front line of defense.  If these folks appreciate what’s needed to appropriately mitigate risk and have the knowledge of your organization’s standards, the appropriate credit culture can be maintained more effectively from the beginning.  Reward these Relationship Managers that are structuring deals and embracing your culture in-front of their peers.


Strength in Numbers

The CEO and Executive Management set the tone and must be comfortable reiterating who your lending institution is and who they are not.  As with any standards, consistent communication in repetition is critical.  Remember, there is no better support for a decision than providing facts.  Clearly define the risk appetite and hold each other accountable to live up to that and not be situationally swayed.  With it being at the top of the cycle you are potentially getting requests to change hold limits, but hold strong.  Track exceptions through reports evaluating any changes since origination.


Vintage Analysis

It’s useful to understand your loan performance over the life of a loan and not just at a single juncture.  In case your loans default at a higher than expected rate you should leave some buffer between the interest rate and your expected loss.

As part of proper portfolio management to analyze how loans perform with age here are some questions to consider:

  • Is there heavy origination in a specific segment?
  • Has risk changed?
  • Are there greater exception levels?
  • Are you making more exceptions?  


The New Frontier

While there are a lot of shiny objects out there, focus on lending segments in which core competencies exist.  If interest arises in a particular sector outside of core competency then write-up a white paper on what variables your organization would like to be able to see as a ‘sector example’ and this can be a reference to any on the front lines.  If this is a new sector, can you simplify the fundamental risk?  If not, then it is most likely not understood well enough to be confident in the loan.  Two or more in your organization should be able to have a high level understanding of this new sector.  Also, it’s a good method to have a bucket where you reevaluate and assess new sector loans 12 months after origination.  Ensure they are performing the way you desire.



Understand all risks involved with the deals you are pursuing.

Are your controls to measure risk as robust as they should be in today's environment?

When the lending environment changes you need to be ready.

Prepare for the next cycle by being aware of the following:

Identify your borderline credits.

How many do you have that are performing but sensitive to economic hiccups. When hiccups occur what loan types in your portfolio leave the largest amount of exposure?

Loan segmentation should regularly be applied based upon your comfort level and that of your institution. If the need is there to re-align your credits then move those not meeting risk levels to increased rates.

Plan for interest rates and cap rates to change.

Make sure to apply stress testing to portions of your portfolio for scenarios of interest rates and cap rates increasing. Underwrite for a higher interest rate to better understand your risks.

To neutralize both variables it is suggested to run a Debt Yield: Debt Yield = Net Operating Income/ Loan Amount. Based on these results determine if there is still positive cash flow.

Understand the ‘deal creep’ that can occur.

Enlist the process of looking at potential clients in terms from your first meeting to what the terms are when/if they close. How many exceptions are being made to get the deal done? Is your institution consistently comfortable with that amount? At what point are you willing to walk away from the deal?

Set exposure limits and do not exceed those limits. Internally, it would be good to post green, yellow, and red lighted loans taking place each month to lenders in your institution to assist them with determinations.

The ‘What’ and ‘Where’ matters for diversification.

Think about how economic downturns can affect certain concentrations by different factors. For example, if a majority of your deals are in the same geographic area and that area is highly volatile to economic downturn it would be wise to focus some of your efforts in a drastically different geography to off-set.

Also, if your portfolio is highly concentrated with retail it is important to understand your tenants and their volatility. Understand your exposure of getting that one big deal versus having several smaller, more diversified deals.

Transparency and measurement are a must.