Open the Door to Your Loans and Welcome in the Independent Review: This Is the Fifth and Final Installment in a Series on Problem Loans and Workouts. the RMA Journal Hopes You Have Found Value in These Articles
Hanley, Claude A., Jr., The RMA Journal
It is a truism of credit risk management that loan review is vital to maintaining the overall health of an institution's loan portfolio. Among other attributes, it is an important means to surface problem loans and make sure they are addressed in a timely manner. Because loan officers are typically the most familiar with the borrower's situation, they should have primary responsibility for assigning to the loan the appropriate asset quality rating (AQR, also known as the risk rating) and to identify and report emerging loan problems. However, this may not happen for a variety of reasons, including lack of time, poor guidance in how to apply the AQR, misplaced incentives, and lack of training.
Furthermore, individuals who review loans should not have a vested interest in the credit grade. For instance, a lender may assign a higher AQR to a credit (say, a 5 instead of a 3) because the bank's compensation formula penalizes a downgrade. But even if loan officers properly underwrite and grade each loan, that doesn't address the risk issues arising from concentration or changes in the composition of the portfolio. Heightened vigilance is especially important nowadays, as the era of unprecedented credit quality may have lulled many banks into a false sense of security.
Most institutions claim to have a loan review process in place; however, the process at many institutions simply is not as rigorous as it ought to be. Let's examine the elements that constitute an effective, independent loan review function, including the responsibilities of the group, the scope and content of the review, and the required resources.
Definition of Loan Review
First, let's define what we mean by the term "loan review." Quite simply, it is 1) an independent third party's assessment of the overall quality of a bank's loan portfolio; 2) the institution's degree of compliance with existing lending policies and procedures, laws, and regulations; and 3) the relative collectibility of loans. Independent loan review should not be confused with the ongoing monitoring performed by the loan officer on an individual borrower or the various loan review responsibilities assigned to credit administration, loan administration, problem-loan workout, or other areas of the bank. Independent loan review is somewhat strategic in nature--less concerned with the performance of individual credits than with assessing the …
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Publication information: Article title: Open the Door to Your Loans and Welcome in the Independent Review: This Is the Fifth and Final Installment in a Series on Problem Loans and Workouts. the RMA Journal Hopes You Have Found Value in These Articles. Contributors: Hanley, Claude A., Jr. - Author. Magazine title: The RMA Journal. Volume: 89. Issue: 6 Publication date: March 2007. Page number: 48+. © 2007 The Risk Management Association. COPYRIGHT 2007 Gale Group.
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