The Importance of a Credit Review and Its Steps
Experienced lenders know for a fact that every loan involves risks and that is why they depend a lot on underwriting policies, which are counter-offered to every loan application and which are partially taken up by a loan portfolio management (LPM) team, which lenders follow as a prime requirement before any loan approval. Banks, therefore, warrant the success of a credit review based on the effective management of the LPM team.
The primary activity of a LPM is more focused on the credit review of loan documents submitted by banks by assessing the following: the financial loan application including the repayment risks, compliance of the borrower with the lending procedures and policies and by checking any 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.
Once the bank has submitted all necessary documents to the LPM team, which should include the following 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, the LPM team will take time to be methodical in examining all these documents. Because it is impractical for the LPM team to review the entire portfolio, the second step in the pre-file review is to select a sample of files to assess the portfolio quality, the goal of which is to identify all loan issues, such as types of loans that have greater risks, the sampling percentage will be based on the type of loan, the number of different loan products, and size of portfolio. It takes an expert to handle the sample selection because what is critical in this process is that if the sampling does not necessarily represent the entire submitted documents, chances are that the credit review is not thorough and will be compromised.
As soon as the loan sample portfolio is selected, the next step is the file review and the LPM team usually meets with the bank or lender to be able to discuss individual loans and its corresponding issues. 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.