The initial process of qualifying a borrower for a loan is built on verifying their ability to repay the loan using the resources they have on hand, but reviewing their finances doesn’t end when the loan gets booked. If anything, 2020 has been a good example of how a borrower’s resources might change throughout the life of the loan.
While commercial loan review is not something new, we believe this is an excellent opportunity to evaluate your current procedures and exposure limits.
The ultimate goal is to build a loan review schedule that efficiently matches your credit union’s resources with your risks. The time that your staff has to dedicate to loan review is finite so allocating more of your team’s time to the highest risks in the portfolio is essential.
Below is a simple example of different review and monitoring levels that might be appropriate for a mid-size credit union.
Level I – Payment Performance only
- These loans are selected for further review only in the event of a missed payment.
- Exposure limits for unsecured loans are less than $20,000 and secured term loans are less than $75,000.
- Time needed: minimal
Level II – Payment/Score Review
- These loans are examined annually for payment performance, personal credit scores, and business credit scores.
- Exposure limits for unsecured loans are $20,000 – $50,000 and secured term loans are $75,000 – $250,00.
- Time needed: 2 hours per loan
Level II – Full Reanalysis
- These loans are re-underwritten with current financials every 1-3 years.
- Exposure limits for unsecured loans are greater than $50,000 and secured term loans are greater than $250,000.
- Time needed: 10 hours per loan
This example demonstrates how a credit union should dedicate their resources to a smaller set of loans that represent a larger credit risk to the institution, instead of spreading their time between a larger number of loans that present less risk.
In addition to tying up internal resources, Full Reanalysis reviews can present a challenge with member relations. An annual request for updated financials and tax returns from a lender is not usually a busy borrower’s highest priority so it’s important to collect only when necessary.
Even when the economy is stable, portfolio monitoring will continue to be a large focus of examiners and auditors. A well planned strategy that is executed consistently will ensure better portfolio outcomes and a smoother exam experience.
Whether you have a seasoned book of business or are looking to begin offering business loans for the first time, Lucro Commercial Solutions can help you establish policies that maximize your impact with your borrowers. We can assist with reviews by setting up custom Tickler workflows for your team or take it a step further and outsource your reviews to our dedicated compliance specialists and business loan experts. Visit www.lucro.org/What-We-Do/Lucro-Services to learn more or contact Tami Chandler at email@example.com.