People Make the Difference in a Successful Comprehensive Loan Review

There are several methods to conduct a loan review; which method is used depends on the culture and overall organizational strategy of a financial institution. Some of our clients want affirmation they are applying the proper risk ratings to loans, while others want to know how similarly sized organizations are addressing challenges in the industry and how to be prepared for their next safety and soundness exam. Still others want to be industry leaders in risk management efforts, making sure they are doing everything they can to properly identify and mitigate risk in the loan portfolio. It is critical for our team to fully understand the unique needs and strategic objectives of our clients; this allows us to fully customize our approach to loan reviews and provide a report that will help our clients achieve these goals.

In previous blogs, we’ve discussed the importance of the organization’s Audit Committee, Supervisory Committee or Board of Directors in clearly identifying the scope of a loan review and setting expectations for an ongoing loan review program. In this blog, we’ll focus on our comprehensive approach to loan review and how it compares to a risk-rating-only review.

In banking, it’s people that make the difference. Money is green. A loan is a loan. An interest rate is an interest rate. But, as we all know, not all bankers are the same. The real value of a banker is understanding the customers’ needs and tailoring a loan structure to help them achieve those goals. Some bankers are order takers, providing the credit structure and terms generally requested by their borrowers, regardless if it’s the right structure. Others are value-added partners, taking the time to understand their clients’ needs and using their experience to tailor a credit structure which will help their clients reach their goals, even if it wasn’t what the client originally requested.

The same is true in the loan review profession. We’re proud of the experience and knowledge our team brings to our clients. It’s that experience that allows us to help banks and credit unions say ahead of the changing landscape of the financial services industry, be fully aware of examiner expectations, and accomplish the strategic goals set forth by the Board of Directors, all while helping to identify and avoid risk which could lead to credit losses or examiner criticism.

To accomplish this, our comprehensive loan review approach includes reviewing our client’s analysis and underwriting, both at the time of loan approval and through the ongoing management of the loan relationship. We independently recommend a risk rating based upon available information and compare that risk rating to the risk rating assigned by the financial institution. We also closely review our client’s actual procedures compared with their defined loan policy, and make recommendations for improvement. We review loan documentation and identify any material deficiencies, which could include errors or credit terms extended outside of the actual approval. Finally, we compare our client’s actual process or loan policy to examiner expectations. These are areas that could result in loan losses for our clients or examiner criticism.

The majority of our clients select this comprehensive option for loan review engagements, as they understand and appreciate the value that this approach brings. However, the most common alternative is a risk-rating-only loan review, where we focus solely on the financial and collateral information in the file and independently apply a risk rating. This approach can give our client affirmation they are accurately applying risk ratings. In the current credit cycle however, material risk rating changes are not often found; this is the result of generally good economic conditions raising the financial performance of the vast majority of borrowers, best described as the “rising tide lifts all boats” scenario. A risk-rating-only approach tells our client their risk ratings are appropriately identified, but there are other areas this approach does not address that would help minimize credit losses in the next downturn. Here are a few examples:

1. Actual practice compared to loan policy: Are there areas of the loan policy our client is not in compliance with? Are loans documented in the manner with which they were approved? Are policy exceptions clearly identified through the approval process, and tracked by senior management for review by the Board of Directors?
2. Examiner expectations: How does the loan policy and overall practice of our client compare to examiner expectations, which can include areas such as appraisals, evaluations, underwriting and other areas of examiner focus? Is our client proactively prepared for their next safety and soundness exam?
3. Best practices: How are similarly sized organizations in the industry tackling some of the same challenges that our client is facing, and what best practices can be provided?
4. Loan structure: Are there improvements in the manner for which a client extends credit to a certain borrower or industry which will help mitigate risk, avoid losses, and improve the chances that the borrower will achieve their strategic objectives?
5. Process improvement: What challenges exist in the bank’s risk management and loan documentation process, and hat best practices exist to help improve efficiencies?

We literally review thousands of loan relationships ever year. Put our experience for more than just risk ratings to work for your benefit.

Peter Nugent is Director and founder of Enlighten Financial, a specialized consulting firm that focuses on providing loan review and risk management services to community banks and credit unions. Peter guides the company’s service offerings, which include in-depth loan reviews, commercial and personal underwriting/analysis, internal process improvement and workout services. To talk to Peter directly, please call: (920) 354-6797.