Lessons Learned from Years with Reviews

Credit Review and Its Procedures

Because lending money entails great risks, lending institutions make it a point to curb down the risk by providing underwriting policies, which are internally provided in their loan agreement and are reviewed, as well as managed by a loan portfolio management (LPM) team, either outsourced or arranged by investors of the lending institutions. For banks, what they consider safe and sound with respective to loaning is if the LPM team has effectively processed the credit or loan review.

The main focal points in a credit review, as processed by the LPM team, are studying in its entirety the loan application information which includes the repayment risks, assessing how a borrower is able to comply with the loaning procedures and policies, and finding out if there are any lapses in the documentation. Principally, a credit review, in order to go through the mentioned assessment proceedings, undergoes three steps of review: pre-file, file, and post-file.

A lot of meticulous reviewing of documents, provided by the bank, is performed by the LPM team in a pre-file review, the likes of which are: loan policy and its underwriting guidelines, such as risk grade system and loan loss reserve policy; watch list and problem loan reports; delinquent loan reports; list of all loans which includes the note number, borrower’s name, original loan amount, maturity date, current risk rating, outstanding balance, available balance, and other relevant information requirements. Because it is impractical for the LPM team to review the entire portfolio, the second step in the pre-file review is to select a sample of files to assess the portfolio quality, the goal of which is to identify all loan issues, such as types of loans that have greater risks, the sampling percentage will be based on the type of loan, the number of different loan products, and size of portfolio. In most cases, sample selection is performed by the most experienced because if the sampling does not represent the entire portfolio, the value of the credit review will be compromised.

During the file review and after determining the sample, the LPM team will have to meet with the bank or lender to discuss individual loans and give recommendations on some loan issues. The file review tackles seven related areas, which are: credit initiation which involves the review of initial underwriting policies, such as financial statements, primary and secondary source of repayment, management and appraisal; loan structuring which is the evaluation of repayment terms against the borrower’s ability to repay; loan approval procedures; verification of credit/collateral documents; verification of ongoing monitoring; evaluation of problem loan management; review of action plans/agreements on delinquent loans. Finally, the post-file review is all about the provision of a summary report by the LPM team which includes its findings, conclusions, and recommendations.

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