​RMAG Best Practices for Risk & Exposure Management: Part 3

Posted July 26, 2017

Earlier this year the NACHA Risk Management Advisory Group (RMAG) conducted a survey of the methodologies used by Originating Depository Financial Institutions (ODFIs) to manage ACH risk in their client portfolios.  The intent of the survey was to use the results to develop educational materials and best practices for ODFIs to consider as they manage their client portfolios.  This is the third in a series of five articles, one for each of the five parts of the survey.
The following are the recommended best practices for Underwriting Credit Origination:

  1. Establish criteria for underwriting credit origination:  The criteria used should be consistent with your financial institution’s Credit, Credit Risk, and ACH policies. Refer to your internal policies for additional guidance.  Among the key criteria most frequently mentioned by the survey respondents were the following:

    • Credit worthiness (as defined by your institution)
    • New client vs. Existing client
    • Length of time the client has been with your financial institution
    • Self-Origination vs. being a Third Party Originator
    • Business Segment or Line of Business
  2. Establish criteria for reviewing clients on a regular basis:  Your financial institution’s Credit Policy will likely address the overall requirements for a credit review, be it annually, semi-annually, or quarterly.  In addition to those overall requirements your financial institution may have additional  requirements for specific clients or specific categories of clients:

    • New clients may be subject to more frequent reviews until they have established a track record with your institution.
    • There may be specific requirements for clients who operate in lines of business that have been classified as “high risk” by your institution.
    • Clients who have experienced a recent change in their financial condition may have to be reviewed more frequently.
  3. Establish criteria for which clients may be required pre-fund their ACH origination activity:

    1. Credit worthiness (as defined by your institution)
    2. Recent change in the client’s financial condition
    3. Business segment of the client
    4. Length of time as a client
    5. Client willingness to provide financial statements

      Note that these criteria match very closely with the criteria for overall underwriting of credit origination clients.  Most financial institutions have established credit scoring systems for clients, and generally the lower the scoring the more likely the institution is the require that the client pre-fund their ACH activity.

      Several survey respondents indicated that their financial institution’s Credit Policy required that all ACH origination clients to pre-fund their ACH activity.

  4. Review all criteria whenever Risk Policies are updated:  Traditionally Risk Policies within a financial institution are updated either annually, or bi-annually.  Make sure that the criteria for requiring a risk review, and the criteria for requiring pre-funding are updated at that time.
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