3 Keys to effective loan administration
With apologies to famed sportscaster Dan Patrick, you can’t stop all bad loans; you can only hope to contain them.
Regulators have long recognized that the initial credit-granting process is a bank’s first defense against credit risk. But they’ve also highlighted the importance of adequate loan administration in managing credit risk after the loan has been made.
“Weaknesses in credit administration can pose significant safety and soundness issues for the bank,” the Office of the Comptroller of the Currency’s Comptroller’s Handbook on Loan Portfolio Management states. “When [Management Information Systems] deficiencies or inaccuracies jeopardize or restrict credit risk management practices, examiners will need to identify the root cause and initiate corrective action.”
Sageworks Kevin Johnson says monitoring the loan portfolio is vital to ensuring good loans don’t go bad.
“For every loan, the bank starts out with what they think is a good loan decision,” he said. “Somewhere along the way, it can turn out to not be such a good idea.”
There are several keys to a financial institution’s effective loan administration, but here are three to consider as you review the existing loan administration system:
• Do you get accurate information from clients on a timely basis?
• Can you analyze that data and recognize whether something is amiss?
• Are you taking action where warranted?
Accurate, timely information. The backbone of loan monitoring is the ability to get updated financial statements, insurance documents and collateral documentation in a timely manner, and to be able to access that information quickly. Systems should be designed to remind staff of information needs, to automate client correspondence as much as possible, and to track the collected data easily.
Analysis that calls out potential trouble spots. Many financial institutions have to pull loan-related information from the core processing system and either combine it with data from paper files or manipulate the information (adding to it or performing calculations) in order to monitor the health of the loan. A loan administration system that easily provides automated reports of exceptions or that standardizes risk ratings can help bankers perform loan reviews quickly in order to assess whether a borrower is headed for trouble.
Action. Effective loan administration systems make it easier for bankers to take proactive steps to keep the portfolio healthy. This can mean providing information early enough to allow the bank to work with the borrower to avoid late payments, or it can mean taking other action (such as adjusting the risk rating or taking a reserve on the individual loan) as warranted to minimize institutional credit risk. “Your first loss is always your best loss,” Johnson says.