What is Loan Prepayment Analysis? Why is it important?
A loan prepayment analysis gives you the information needed to project, anticipate, and manage interest rate risk and liquidity risk. Determining prepayment speeds specifically for your credit union, is essential to accurate ALM modeling.
This knowledge is also helpful in many facets of the planning, budgeting, and forecasting process.
The regulators are asking for more: this institution-specific data also provides supportable and documented loan assumptions to meet the increasing regulatory scrutiny.
A loan prepayment analysis from Mark H. Smith Incorporated provides you with the following:
- Prepayment Speeds – An estimate of the prepayment speed of loans in various interest rate shock scenarios based on historical and current data.
- Beta and Lag – An historical beta coefficient, also known as a rate sensitivity factor, is estimated for each loan type. The beta is derived from the historical loan interest rate. It displays the percentage the loan rate adjusts based on a given change in interest rates. Credit unions do not always adjust rates immediately and the historical data also estimates an average delay period or lag.
- Summary – A written summary of the results along with derivation details. Phone consultation regarding the results and addressing questions.