5 Common lending challenges and how lending software can help

4. Collecting current financial information for annual reviews.

According to the Federal Reserve Bank of Atlanta, an effective loan review system should, at a minimum, promptly identify loans with potential credit weaknesses, identify trends affecting the collectability of the portfolio and assign risk grades based on quantitative data. To conduct a periodic review of commercial borrowing relationships, the institution must have current business and personal financial information. The collection process can be improved with software that defines responsibilities, tracks activities, and logs receipt dates. A borrower’s failure to provide updated financial information may suggest they are facing financial issues. Quickly identifying borrowers with overdue documents can act as an early warning sign.

Ashbaugh points out a frequent issue in loan reviews faced by many financial institutions. He states, “We, the bankers, were responsible for gathering updated financial information from our customers.” This information was necessary for underwriting to conduct annual reviews.” "Reviews were not always completed on time. We had to chase down financials and follow up with underwriting about the status of reviews. This was all while trying to keep track of everything to provide management with updates." An effective financial tickler system, along with an annual workflow process, lays the foundation for compliance with regulatory directives. For example, the loan administration team diligently tracks and uploads current financial data. This action triggers a notification to the next "owner" that the relationship is ready for analysis and risk grading. As each step is completed, the process will move forward until the analysis and risk grade assignment are approved. A systematic, centralized system can replace piecemeal communication. Management can access status reports. These reports display the current phase of a loan application. They also indicate the overall completion percentage.

5. Transfer of watch-list credits to special servicing.

Upon certain specified events, primarily a default or breach of covenant, the administration of a loan should be transferred from the banker to special servicing. For example, suppose the loan or relationship has been classified at or above a specific, defined risk level. In that case, the loan file, including collateral and credit documents, will be passed on to the special assets group. This process raises a few procedural questions:

• Will the banker meet with the Special Assets Department to communicate the customer’s financial situation?
• Should Loan Administration consider updating ticklers for financial data to quarterly or monthly instead of annually? Will new covenants be agreed upon and monitored?
• Is a new appraisal being ordered?
• Has the loan been evaluated for impairment?
• Has Special Servicing developed its loss mitigation strategy?

An end-to-end solution can tackle these important questions by following a series of clear steps and approvals. It includes role-based routing and related transfers. In other words, the advantages of an automated process extend beyond underwriting and servicing. They also reach into portfolio management.