Key Elements of an Effective Loan Review

Key Elements of an Effective Loan Review
In a recent blog post, Tod Ellis from PCI Associates highlights the importance of loan reviews in managing credit risk. Loan reviews provide an assessment of the quality of a loan portfolio, including repayment risks, compliance with lending procedures, and lapses in documentation. By conducting loan reviews, banks can identify issues and make modifications to their lending procedures and practices to address those issues. Banks that fail to address problems early are prone to suffering from systemic weaknesses that can lead to a deterioration in portfolio quality.

The loan review process consists of three steps: pre-file review, file review, and post-file review. During the pre-file review, the loan review team reviews loan policies, underwriting guidelines, and key reports to select a representative sample of loans to be reviewed. In the file review, the team meets with the bank's lending staff, reviews underwriting and collateral files, and discusses individual loans with loan officers. Finally, the post-file review involves issuing a formal report summarizing the findings, conclusions, and recommendations of the loan review.

Loan reviews should be conducted by independent teams with lending and credit experience. The length of time spent on a loan review depends on the size of the bank, but the process typically takes between 30-45 days. Ideally, banks should have annual or semiannual loan reviews, but the frequency may be adjusted based on the findings of the review. The most common deficiencies found in loan reviews include inadequate credit initiation and loan structuring, lack of evidence of approval in loan files, and insufficient documentation and monitoring of loans. By addressing these deficiencies, banks can better manage credit risk and improve the quality of their loan portfolios.
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