Credit risk is an inherent and evolving challenge in lending. It refers to the possibility that a borrower may fail to repay their loan, leading to financial loss for the lender. To mitigate this risk, lenders conduct thorough analyses of potential borrowers and consider key factors that influence loan quality.One widely used framework for evaluating borrowers is the Five C’s of Credit:
- Character – A borrower’s credit history, often assessed through their credit score.
- Capacity – The borrower’s ability to repay, evaluated using income and debt-to-income (DTI) ratio.
- Capital – The borrower’s available funds for a down payment.
- Collateral – The value of assets securing the loan.
- Conditions – External factors such as interest rates, economic conditions, and lending trends.
Loans without collateral—such as credit cards—pose particularly high credit risks. Without assets to recover in case of default, lenders face greater exposure to financial loss.
NCUA’s 2025 Priorities on Credit Risk
Credit risk extends beyond individual borrowers and can impact entire loan portfolios. The National Credit Union Administration (NCUA) has identified credit risk as a key area of focus for examiners in 2025.
Top concerns include:
- Used vehicle loans – Currently experiencing record-high delinquency and charge-off rates.
- Credit card loans – Delinquencies and charge-offs are at their highest levels since the global financial crisis.
To address these risks, the NCUA will closely evaluate how credit unions are managing loan modifications, collection efforts, charge-off practices, and credit risk concentrations. Examiners will assess whether reasonable efforts were made to assist borrowers facing financial hardship.
Strategies to Limit Credit Risk
Lenders can take proactive steps to reduce exposure to credit risk, particularly in high-risk loan categories like used vehicles and credit cards.
Key strategies include
- Applying stricter evaluations of the Five C’s of Credit to reduce delinquencies.
- Diversifying loan portfolios by capping exposure to any single loan category.
- Engaging with borrowers early to modify loans and develop repayment solutions.
- Implementing timely and effective collection strategies when repayment is unlikely.
- Reducing credit limits for higher-risk borrowers.
As economic conditions fluctuate, credit risk remains a top concern for lenders and regulators. With used vehicle and credit card loan delinquencies at historic highs, lenders must stay vigilant and adaptable. By refining risk management strategies and proactively working with borrowers, financial institutions can strengthen their portfolios while supporting their customers.Have questions or need expert guidance on managing credit risk? Contact us today to learn how we can help protect your loan portfolio.
