Part 3 of 4 (Part 1, Part 2, Part 4) 

Earlier this year, the Nacha Risk Management Advisory Group (RMAG) met to expand upon a previous RMAG initiative on the topic of risk and exposure management. This is the third in a series of articles in which RMAG provides sound business practices on various risk management topics based on its experience and expertise.

The following are the recommended sound business practices for underwriting credit origination:

• 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 are the following:
   
  • Creditworthiness (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
     
• 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 businesses 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
     
• Establish criteria for which clients may be required pre-fund their ACH origination activity:
  • Creditworthiness (as defined by your institution)
  • Recent change in the client’s financial condition
  • Business segment of the client
  • Length of time as a client
  • Client willingness to provide financial statements
     
  Most financial institutions have established credit scoring systems for clients. Generally, the lower the scoring the more likely the institution is to require that the client pre-fund their ACH activity. 
   
• 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.

Please continue to follow Nacha Member NewsLink for additional articles from the Nacha RMAG on sound business practices in risk and exposure management.

The member-only Risk Management Advisory Group (RMAG) works with industry stakeholders and key Nacha staff to continually assess risks faced by Network participants. The group makes recommendations to Nacha about risk education, tools and resources, risk mitigation policies and potential rule changes. Learn more.