Generally, a financial institution's credit risk is not increased by the mere fact that a loan is originated through an e-banking channel. However, management should consider additional precautions when originating and approving loans electronically, including assuring management information systems effectively track the performance of portfolios originated through e-banking channels. The following aspects of on-line loan origination and approval tend to make risk management of the lending process more challenging. If not properly managed, these aspects can significantly increase credit risk.
- Verifying the customer's identity for on-line credit applications and executing an enforceable contract;
- Monitoring and controlling the growth, pricing, underwriting standards, and ongoing credit quality of loans originated through e-banking channels;
- Monitoring and oversight of third-parties doing business as agents or on behalf of the financial institution (for example, an Internet loan origination site or electronic payments processor);
- Valuing collateral and perfecting liens over a potentially wider geographic area;
- Collecting loans from individuals over a potentially wider geographic area; and
- Monitoring any increased volume of, and possible concentration in, out-of-area lending.
Liquidity, Interest Rate, Price/Market Risks