The examiner's evaluation of the loan portfolio involves
much more than merely appraising individual loans.
Prudent management and administration of the overall loan
account, including establishment of sound lending and
collection policies, are of vital importance if the institution
is to be continuously operated in an acceptable manner.
Lending policies should be clearly defined and set forth in
such a manner as to provide effective supervision by the
directors and senior officers. The board of directors of
every institution has the legal responsibility to formulate
lending policies and to supervise their implementation.
Therefore examiners should encourage establishment and
maintenance of written, up-to-date lending policies which
have been approved by the board of directors. A lending
policy should not be a static document, but must be
reviewed periodically and revised in light of changing
circumstances surrounding the borrowing needs of the
institution's customers as well as changes that may occur
within the institution itself. To a large extent, the economy
of the community served by the institution dictates the
composition of the loan portfolio. The widely divergent
circumstances of regional economies and the considerable
variance in characteristics of individual loans preclude
establishment of standard or universal lending policies.
There are, however, certain broad areas of consideration
and concern that are typically addressed in the lending
policies of all banks regardless of size or location. These
include the following:
General fields of lending in which the institution will engage and the kinds or types of loans within each general field;
Lending authority of each loan officer;
Lending authority of a loan or executive committee, if any;
Responsibility of the board of directors in reviewing, ratifying, or approving loans;
Guidelines under which unsecured loans will be granted;
Guidelines for rates of interest and the terms of repayment for secured and unsecured loans;
Limitations on the amount advanced in relation to the value of the collateral and the documentation required by the institution for each type of secured loan;
Guidelines for obtaining and reviewing real estate appraisals as well as for ordering reappraisals, when needed;
Maintenance and review of complete and current credit files on each borrower;
Appropriate collection procedures including, but not limited to, actions to be taken against borrowers who fail to make timely payments;
Limitations on the maximum volume of loans in relation to total assets;
Limitations on the extension of credit through overdrafts;
Description of the institution's normal trade area and circumstances under which the institution may extend credit outside of such area;
Guidelines that address the goals for portfolio mix and risk diversification and cover the institution's plans for monitoring and taking appropriate corrective action, if deemed necessary, on any concentrations that may exist;
Loan Review Systems The terms loan review system or credit risk review system refer to the responsibilities assigned to various areas such as credit underwriting, loan administration, problem loan workout, or other areas. Responsibilities may include assigning initial credit grades, ensuring grade changes are made when needed, or compiling information necessary to assess the appropriateness of the ALLL. The complexity and scope of a loan review system will vary based upon an institution’s size, type of operations, and management practices. Systems may include components that are independent of the lending function, or may place some reliance on loan officers. Although smaller institutions are not expected to maintain separate loan review departments, it is essential that all institutions have an effective loan review system. Regardless of its complexity, an effective loan review system is generally designed to address the following objectives: To promptly identify loans with well-defined credit
RBT Loan Qualification
Personnel to involve in the loan review function are qualified based on level of education, experience, and extent of formal training. They are knowledgeable of both sound lending practices and their own institution’s specific lending guidelines. In addition, they are knowledgeable of pertinent laws and regulations that affect lending activities.
About RBT Loan officers
Loan officers are generally responsible for ongoing credit analysis and the prompt identification of emerging problems. Because of their frequent contact with borrowers, loan officers can usually identify potential problems before they become apparent to others. However, institutions should be careful to avoid over reliance upon loan officers. To avoid conflicts of interest, management typically ensures that, when feasible, all significant loans are reviewed by individuals that are not part of, or influenced by anyone associated with, the loan approval process. Larger institutions typically establish separate loan review departments staffed by independent credit analysts. Cost and volume considerations may not justify such a system in smaller institutions. Often, members of senior management that are independent of the credit administration process, a committee of outside directors, or an outside loan review consultant fill this role. Regardless of the method used, loan review personnel should report their findings directly to the board of directors or a board committee.
Factors to Consider in Estimating Credit Losses Estimated credit losses should reflect consideration of all significant factors that affect the portfolio’s collectibility as of the evaluation date. While historical loss experience provides a reasonable starting point, historical losses, or even recent trends in losses, are not by themselves, a sufficient basis to determine an appropriate ALLL level. Management should also consider any relevant qualitative factors that are likely to cause estimated losses to differ from historical loss experience such as:
Changes in lending policies and procedures, including underwriting, collection, charge-off and recovery practices;
Changes in local and national economic and business conditions;
Changes in the volume or type of credit extended;
Changes in the experience, ability, and depth of lending management;
Changes in the volume and severity of past due, nonaccrual, troubled debt restructurings, or classified loans;
Changes in the quality of an institution’s loan review system or the degree of oversight by the board of directors; and,
The existence of, or changes in the level of, any concentrations of credit.