Outsourcing Risk Management in a Time of Uncertainty

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Today’s lenders face challenges on many fronts.

Although the pandemic recently passed its four-year anniversary, it continues to generate lingering economic effects. Certain sectors of the commercial real estate market, especially office, remain distressed, and it is uncertain whether those markets will ever fully recover, as workers resist returning to congested city centers.

If that weren’t enough, the Fed’s ongoing campaign of rate hikes to combat inflation has depressed lending volume, and the collapse of Silicon Valley Bank and First Republic early last year brought renewed concerns about the banking sector. In response, financial institutions have begun implementing layoffs and hiring freezes, leaving support staff to work shorthanded.

Bank risk managers are understandably on edge, as they wait for a long-anticipated recession to come to fruition, to be accompanied by the inevitable rises in loan delinquency, charge offs, and foreclosures that are sure to follow.

During these times of uncertainty and rising portfolio risk, lenders are often forced to divert staff to risk management functions like collections, workout, loan reviews, and environmental due diligence. Unfortunately, this approach can have a “double-whammy” effect, by both pulling top performers away from client-facing and business generation activities, while forcing them to take on risk management activities that they don’t necessarily have the skills or experience to perform effectively.

How Outsourcing Can Help

Fortunately, there is a solution that can help keep lending operations rolling along, while ensuring that risk management activities are given proper focus and attention during times of stress.


Here’s some ways that outsourcing to a qualified, experienced third-party risk management firm can help:

  • Pick up the slack: During times of uncertainty, banks will often institute hiring freezes, and divert key staff like loan officers and relationship managers to risk management activities. But this can be short-sighted. A better approach is to leverage the experience and expertise of an outsourced third party to help manage an increase in risk management and due diligence activities, while keeping core customer-facing staff focused on what they do best. “If there is a recession to come, you will see a redeployment of lending officers from the frontline to supporting special assets and distressed assets,” said John Rybak, Senior Vice President, Environmental Risk Manager at Truist Financial, who was a guest on the ERIS Risk-E Business podcast. “We are seeing potential hiring freezes. We’ve got capacity issues. The candidate pool is weak. The ‘plan B’ is to outsource until we reach capacity for a sustained period of time, a freeze is lifted, and more candidates become available in the market.”
  • Offer flexibility: Even in the best of times, lenders are faced with fluctuating loan volumes due to seasonality, rate changes, and economic conditions. Using a trusted outsourced risk management partner can help lenders to ramp up their due diligence support as needed, and just as easily ramp it down as capacity constraints ease.
  • Provide expertise and experience: For those financial institutions that have a dedicated staff member assigned to environmental due diligence and reviews, they may not have the wealth of skills and experience needed for the job. By enlisting a trusted outsourced risk management partner, you get decades of experience and exposure to industry-wide best practices gleaned from working with lenders of all sizes and risk appetites.
  • Achieve cost-effectiveness: Outsourcing your environmental risk management program does not have to be cost-prohibitive. In fact, for most typical commercial property loans, the expense of a Phase I ESA, desktop review, or RSRA can be passed through to the borrower as a cost of closing. Of course, in special cases like foreclosures, the lender may be responsible for certain expenses.

Best Practices for Outsourcing Your Environmental Risk Management Program

How you work with your outsourced risk management partner will go a long way toward ensuring a successful and mutually beneficial relationship. Here are some tips:

  1. Set clear goals: Whether you use in-house staff, outside experts, or a combination of both, it’s critical to have clear objectives for what you want to achieve in your risk management program. Start by studying what works for other lenders. For example, Rybak recommends implementing a proven and prudent risk management model that includes three key steps: “Risk is always on the forefront of lender strategic planning. The cycles are normal. The process of risk management and the risk model doesn’t change. Number one, assess the risk. Number two, implement controls. And number three, monitor the results, the residual risk. You should have these practical steps and relationships built into your process, and then when the normal business cycle ebbs or flows, you’re prepared.”
  2. Choose wisely: One of the biggest benefits of partnering with an outsourced risk management firm is the experience and advice that comes with working with hundreds of lenders across the country. That’s why it’s important to find a partner that will offer more than just a “check the box” environmental due diligence service. “Those firms who just call for a Phase 2 in every situation really aren’t that valuable to an educated lender,” Rybak says. “The firms that consult with their clients and separate out the de minima situations from others are the ones who are adding value in the process. Those lenders who are really interested in risk mitigation are searching for quality over price. I’m not saying price is not important, but I am saying it should not always be the driver.”
  3. Communicate expectations: It’s also important to remember that to be effective, a third-party vendor relationship must be a true partnership. This means being transparent with your expectations up front and sharing feedback—both good and bad—as necessary. “Expectations are critical,” Rybak says. “They need to be shared with your consultants. If they’re going to be that trusted partner, share with them this scope, the type of things you need to see, give them a scorecard on how they’re doing and provide them with feedback.”

Risk management is a critical function even in the best of times. During periods of economic uncertainty, it becomes even more crucial. If you need help in planning or implementing your comprehensive risk management program, reach out to ORMS, your outsourced risk management experts.

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