Magazine article Journal of Commercial Lending

The Credit File: Not Just Another Pretty Folder

Magazine article Journal of Commercial Lending

The Credit File: Not Just Another Pretty Folder

Article excerpt

A credit file is the primary file established by a bank for each of its borrowers and should contain all the information needed to make an informed credit decision. The file records how and why a credit relationship developed, what credit risks were identified, and how these risks were properly mitigaged. It provides the reasons a credit was originally extended and why it continues to be extended.


A credit file should clearly reflect the history of the credit relationship and should be complete enough so that an uninformed third party has sufficient information to determine the status of the relationship at all times. A new relationship manager, credit review officer, outside auditor, or regulatory examiner should be able to open the file and have a complete picture of the credit. The file should show:

* How the credit was originally underwritten.

* Why it was structured the way it was.

* What the operational history of the account has been.

* What is going on currently with the relationship and the borrower.

This information, while compiled from many areas -- customer, relationship manager, credit committee, or nonbank sources--should be located in the primary credit file. This can remove the necessity of anyone having to look elsewhere for the same information. In these ever-changing times, many relationship managers are being assigned existing portfolios, and complete and orderly credit files greatly assist the transition process. (*)

Experienced relationship managers tell many tales of taking over an account with a poor credit file and how difficult it becomes to determine what is happening and what has happened. In these cases, the borrower has a significant advantage over the bank, and this can cause problems for weak loans.

Complete credit files begin before a relationship is fully developed between the bank and a borrower. Before a prospect becomes a borrower, sufficient information must be gathered and analyzed to determine if credit should be extended. As a result, a prospect's file should contain the information that forms the basis for a credit file. Having a complete file simplifies and speeds up the negotiation process.

Some banks house all their credit files in a central location, while others maintain credit files in the offices at which the loans are handled on a day-to-day basis. There are advantages and disadvantages to both methods.

Centralized filing leads to better standardization of credit files and the way they are organized. A centralized staff is better able to monitor credit file quality and take steps to improve it, if necessary.

However, centralized files often cause relationship managers to create separate files that they maintain at their offices or desks. These files contain information that they use day to day in administering the relationship. A relationship manager's operating file should duplicate the central credit file; however, it should not contain information not in the primary credit file. Many times, relationship managers forget to forward information to the central credit file and keep it in their own operating files. As a result, the central credit file becomes incomplete.

Decentralized filing, or maintaining the files where the loans are managed, may lead to differing quality of files among different locations as well as different organization of the files. A strong centralized policy on credit file content and organization is required to overcome this problem. On the other hand, decentralized files are often kept more up to date because much of the information received by the relationship manager goes directly to the credit file.



Consistently filing components in credit files to keep them complete and up to date improves credit quality by instilling discipline in the relationship manager. …

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