Lending is the principal business activity for most financial institutions, and loans generally comprise a majority of most financial institutions’ assets. As such, a financial institution’s loan portfolio is one of the greatest sources of risk to its profitability, safety, and soundness.
This fact is well-recognized by various regulators who each require financial institutions to have an appropriately designed and implemented loan portfolio management process. As part of this process, regulators’ safety and soundness guidelines generally require an appropriately designed loan review system. Although its complexity and scope will vary based on a financial institution’s size, type of operations, and management practices, an effective loan review process is a must for all financial institutions.
Managing loan portfolio risk and complying with regulators’ safety and soundness guidelines require most financial institutions to devote substantial resources to prudent credit underwriting and loan performance monitoring.
Relevant guidance from the Federal Deposit Insurance Corporation (FDIC) suggests that an effective loan review system is generally designed to address the following objectives:
The FDIC also suggests that loan reviews should analyze a number of important credit factors, including:
Incorporating each of these elements into an appropriately designed and efficient loan review process, while tailoring the complexity and scope to fit the specific financial institution’s operations, can be difficult for an institution trying to manage scarce financial and human resources. No two financial institutions are exactly alike, and each must balance risk mitigation, profitability, and safety and soundness by giving due consideration to its specific objectives and needs.
PYA has been successful in developing and performing outsourced loan review services tailored to the specific needs of our clients. PYA can assist you in evaluating your financial institution’s loan review process. Please contact the experts listed below at PYA, (800) 270-9629.