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How is Your Institution’s Loan Review Function Organized?

Kylee Wooten
December 7, 2021
Read Time: 0 min

How do other FIs organize their loan review function?

Regardless of how the loan review function is organized, it’s paramount that the loan review function is independent.

You might also like this whitepaper,
Effective Loan Review.


Effective Loan Review

How to organize the loan review function

Effective loan review is critical to ensure safety and soundness standards and proactively identify potential credit weaknesses. Financial institutions with strong, independent loan review can react more quickly to changes in the market, according to Ancin Cooley, principal of Synergy Bank Consulting and Synergy Credit Union Consulting. 

There are several ways an institution’s loan review function can be organized: internally, externally through a third-party firm, or through some combination of the two. Regardless of how the loan review function is organized, it’s paramount that the loan review function is independent to have complete confidence in the loans.

In-house, External, or Hybrid?

How do other financial institutions organize their loan review departments?

The primary consideration for organizing the loan review function is determining whether the function will be performed by an internal department or completed externally by a third party, such as a loan review or consulting firm. The institution’s size often influences this decision. Larger institutions typically have the resources to staff an independent loan review department, while smaller banks and credit unions may find it more cost-effective to outsource the process.

In a recent Abrigo survey, nearly two out of three financial institutions surveyed said that their institution performed at least some of the loan review process in-house. Thirty-one percent of financial institutions reported performing their loan reviews exclusively in-house, and 33% conducted mostly in-house. Meanwhile, only 8% of respondents outsource all loan review work, and a quarter of financial institutions primarily outsource the function. 

Not surprisingly, no respondents from large institutions (above $10 billion in assets) outsourced loan reviews. But three-quarters of respondents from both institutions with less than $500 million in assets and institutions with $3 billion to $10 billion in assets said they primarily or exclusively performed loan review in-house. Banks and credit unions with $500 million to $3 billion in assets roughly split evenly between those that outsource and those that operate in-house.

Institutions could benefit from a hybrid loan review approach, combining an internal loan review process with a periodic external review. In a hybrid approach, loan review consultants work alongside an institution’s internal program to provide a risk assessment with an outside perspective, along with an evaluation of overall credit administration. While a periodic external review is best practice, it may not be possible for financial institutions with more resource constraints. Regardless of how financial institutions choose to organize loan review, the function must be independent of the lending function of the institution.

Optimize your financial institution's loan review process.

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Independent Loan Review and Reporting

How to determine the loan review reporting structure

In addition to organizing the loan review function, determining the appropriate reporting structure for an internal loan review department is another important consideration. The reporting structure should be organized in a way that allows for testing and open-ended examination. Again, independence and objectivity are essential to an effective loan review, which should be reflected in the structure of reporting to the board or board committee.

There are two primary options for reporting structures, according to Cooley. The first is an “audit” loan review reporting structure, which consists of the loan review function reporting up through the audit committee. This structure allows for a more objective view of risk ratings. In the survey, just 11% of institutions report directly to an internal audit officer.

Other banks and credit unions, often larger institutions, may report directly to a Chief Credit Officer or Chief Risk Officer or directly to the board of directors. Nearly half of survey respondents said that their institution’s loan review department reports directly to the Chief Risk Officer or Chief Credit Officer, or the board of directors. Less than a quarter of institutions report directly to the president or senior lender.

Cooley warns against the latter option, as it may create an independence issue. “A common deficiency in loan review programs is reporting to the Senior Lender or Chief Credit Officer, as this would impair the function’s independence,” he said in Abrigo’s Effective Loan Review whitepaper.

If the function is not entirely independent, it could likely impair the ability to get the “fullness” of what they need to communicate.

An effective loan review process can help financial institutions grow by taking selected risks and avoiding regulatory woes. However, the loan review process must remain independent to be successful. The way the loan review function is organized and how it is reported can significantly affect the independence of the function. 

About the Author

Kylee Wooten

Media Relations Manager
Kylee manages and writes articles, creates digital content, and assists in media relations efforts

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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