4 ‘Exceptional’ ways to improve loan administration: Tracking documentation exceptions
Federal bank and credit union examiners say one element that should be part of any loan portfolio management process is a solid system for tracking exceptions. Tracking deviations from the loan policy and underwriting standards is crucial. But often, it’s analyzing and controlling exceptions related to documentation that can alert a financial institution of a loan that deviates loan-policy or underwriting standards.
On the surface, documentation exceptions may seem minor or may seem less important than exceptions to underwriting policies when it comes to loan tracking. That may not always be the case. Missing, stale or improperly executed documents can, as the OCC Comptroller’s Handbook on Loan Portfolio Management says, “exacerbate problem loans and seriously hamper work-out efforts.”
For example, when a financial institution doesn’t ensure it receives and reviews financial statements or tax returns in a timely manner, it can miss out on opportunities to identify potential problems and to take steps to avoid or mitigate those issues. The institution may identify covenant violations late, which could jeopardize the ability to enforce the loan agreement.
If a financial institution fails to renew a UCC financing statement to give notice of its interest in a debtor’s property, the credit could transition from secured to unsecured. Exceptions could even make headlines. In a $2.1 million foreclosure lawsuit last year, Bank of America acknowledged it had lost the loan agreement with the property’s owner, according to a published report by Crain’s Chicago Business.
Here are four tips to improve your portfolio loan management through better exception tracking:
1. Systematically identify document exceptions. Regular, systematic and proactive identification of document exceptions is the best way to prevent documents from “falling through the cracks.” Many financial institutions may find it difficult to identify exceptions in a systematic and routine way if much of the documentation is contained in physical credit files, or is tracked using spreadsheet programs like Excel. Collateral tracking and tracking customer correspondence via paper files can make it tough to retrieve and centralize information. And spreadsheet-housed data can be prone to more manual and formula errors than if the data were captured in the core or other automated software systems used for analyzing borrower financial data.
2. Initiate timely resolution of document exceptions. Resolving document exceptions can be time consuming and costly, given the sheer number of documents that may be monitored on an ongoing basis. An automated loan management system that can generate and track client correspondence and reduce the administrative workload makes the process of resolving exceptions more cost effective.
3. Ensure that documentation remains valid and current throughout the loan term. Identifying documentation exceptions before the loan closes is obviously preferable, but sound loan administration and risk management is an ongoing process. Having a loan administration system that bridges the core processing system and underwriting systems can allow an institution to conduct post-closing reviews and periodic checks more easily by developing ticklers and generating client emails, letters or phone lists automatically.
4. Analyze patterns in document exceptions. Identifying patterns can point out problems in the origination process, which may prompt changes that can make loan approvals more efficient. Identifying patterns may also help single out staff, business units or geographic locations that need to strengthen documentation compliance. Automated document and covenant compliance reports can get this information into the hands of management and examiners more quickly and efficiently.
Ensure consistency in your credit analysis and documentation.
Examiners understand the importance of document exceptions in evaluating the quality of the financial institution’s lending policies and loan portfolio management. The FDIC’s Risk Management Manual of Examination Policies notes that weak loans manifest themselves in a variety of ways. But it specifically notes that examiners may be able to identify potential problem loans during examinations by finding evidence of missing or inadequate collateral or loan documentation.