Effective Credit Departments
What is the purpose of the credit department in a financial institution? There can be many different answers to this question. It often depends on the size of the financial institution, the complexity of the loan portfolio, and the overall philosophy of financial management.
In some financial institutions, the credit department is considered an expense and little more; it’s an area that does not generate revenue, so it receives little attention from management. Some financial institutions view the credit department as a source of new loan officers; young credit analysts are brought in, taught the lending culture of the financial institution, and sent off to grow the loan portfolio within a year or two. For these financial institutions, the credit department can see a complete turnover every few years, with little or no stability. A third view is that the credit department is a crucial piece of the lending function, helping support the loan department and protect the financial institution from potential losses. The credit analysts are provided with a career path to continue to grow and expand their knowledge and responsibilities. Financial institutions that have this view of the credit department realize some, if not all, of the benefits listed below.
Consistent and accurate underwriting
Underwriting is one of the main purposes of the credit department. Financial institutions that continue to turn over their underwriting staff are likely to experience inconsistencies in the way relationships are underwritten, as there is not a stable core of analysts to train the new staff. Errors are also more likely to occur. Credit analysts learn by doing, so exposure to new types of businesses, industries and loan structures is the best way for an analyst to learn how to underwrite. Young, inexperienced analysts are more likely to make errors due to lack of understanding. Examiners are always focused on the quality of underwriting, so it is important to have a qualified staff.
Financial statement tracking and collection
Effective credit departments have financial statement tracking methods in place to assist with the timely collection of information. Requesting and following up on financial statements can be a time-consuming process. Financial institutions that utilize their credit department for this function provide their loan officers with more time to call on new and existing customers.
Covenant tracking and testing
Covenants are an effective way to manage borrowing relationships. However, it is important to track and test the covenants in a timely manner to ensure borrowers remain in compliance. This function is often completed by the credit department.
Annual review tracking and completion
Annual reviews are a crucial part of portfolio management. Loan officers are often focused on obtaining new business and renewing maturing loans for existing customers, making annual reviews a lower priority. The credit department can be responsible for tracking the timing of annual reviews and ensuring they are completed in a timely manner. This is a key way to monitor the performance of borrowers who do not have a loan renewal or new loan request.
Secondary contact for borrowers
Many financial institutions partner their credit analysts with loan officers, allowing the analyst to learn the portfolio of the lenders he or she is assigned to. The analyst is provided more exposure to the borrower, the borrower gains comfort with the analyst and views him or her as a secondary contact at the financial institution, which is a significant benefit to the financial institution. If the loan officer is not available, the borrower is able to contact the credit analyst to get the needed help. Credit analysts who have a relationship with the borrowers can minimize the loss of business if a loan officer leaves the financial institution, as the credit analyst remains a constant and can assist with the transition to a new loan officer.
Accurate and complete loan documentation
Loan officers are often responsible for reviewing loan documents prior to closings, ensuring the documented terms are accurate and the necessary collateral documentation is provided. This can be a time-consuming process, and one that loan officers might overlook if their focus has shifted to the next customer. This function can be completed by the credit analyst who was responsible for completing the underwriting of the loan and knows the required terms and collateral information.
Credit analysts might find that, over time, he or she enjoys underwriting a certain loan type and/or industry. If your financial institution has a concentration in commercial real estate, you might benefit from having a credit analyst that specializes in underwriting CRE transactions. An agricultural borrower has drastically different financial statements and cash flow drivers than a C&I borrower, so having an analyst that understands agricultural borrowing would greatly help with underwriting these relationships.
The credit department may not be a direct revenue source for the financial institution, but it does play a very important role. An effective credit department will help with risk mitigation and loss prevention. Experienced credit analysts accurately and completely analyze a new loan request to determine if it fits within the financial institution’s risk profile. One error made by an inexperienced credit analyst could result in a large loss being realized by the financial institution in the future.
Enlighten Financial has a team of experienced credit professionals who can assist you with developing your credit department. This includes determining the appropriate credit structure for your organization, as well as helping to develop your credit analysts to ensure they continue to grow and expand their knowledge base.
Kathy Fries is Manager at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape, and lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Kathy directly, please call: (920) 569-2946.