Figuring Out Credit

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 overall quality of work perform by a LPM team is based on the assessment done on a credit review, which includes assessing the loan application with its information and repayment risks, determining how the borrower can comply with procedures and policies, and checking out for 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. With all these submitted portfolios, it will definitely take longer time to review all, so what the LPM team usually follow, which is the second step in a pre-file review, is to select a sample of loans, the aim is to get a sample that is from a large loan to identify loan issues, and from that, the sampling procedure is statistically computed in terms of sampling percentage that will be based on the type of loan, the number of different loan products, and size of portfolio. Because this step may very well end up with a halfway credit review if the sample selection is not properly performed and assessed, the LPM team normally hires an experienced staff to handle this.

It is common practice that after the loan sample portfolio has been selected, during the file review, the LPM team meets with the bank or lender to discuss issues related to individual loans. The file review process is the most tackling in the credit review process because it involves the following relevant areas: reviewing financial statements, primary and secondary source of repayment, loan management and appraisal; loan structuring procedures; loan approval steps, verification of credit/collateral documents; substantiation of ongoing monitoring; assessment of loan management problems; assessment of action plans and agreements on delinquent loans. The last step in the credit review process, which is the post-file review, is the submission of a summary report by the LPM team which comprises their findings, conclusions, and recommendations.

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