Loan Admin 101 – Effective Loan Administration Crucial in Pandemic Era

Mary Ellen Biery
November 9, 2020
Read Time: min

Effective loan administration protects margins, balance sheets

Effective loan administration will protect margins and balance sheets at banks and credit unions over the next year as financial institutions handle the effects of the pandemic-induced economic crisis.

In any economy, but especially in the current one where borrowers’ financial situations are changing or highly uncertain, financial institution loan administration systems deserve a checkup and, in some cases, an overhaul. Prudential regulators have made it clear that while they will adjust supervisory strategies as appropriate to emerging risks of the pandemic, examiner scrutiny will continue assessing basic principles that ensure the safety and soundness of financial institutions.

Loan administration is a basic and yet far-reaching process of lending. A smooth, effective loan administration process is like the defensive line against unnecessary loan losses, given that it impacts operations from the time a loan is approved until it is off the bank or credit union’s books. Likewise, weak loan administration can lead to a blitz on margins -- especially when unnecessary expenses collide with interest-rate pressures.

The sophistication of a loan administration system, of course, depends on the size of the institution and staff, as well as the complexity of its portfolio. As a result, some variations in processes and loan administration systems among credit unions and banks is expected. However, effective loan administration solutions or systems will help lenders avoid the most common documentation- and data-related deficiencies found during examinations. They will incorporate capabilities to address needs that can generally be grouped into three questions:

  1. Does the loan administration software or system capture or generate accurate, timely information in a secure environment?
  2. Does the loan administration software or system enable the financial institution to analyze that information/data and detect existing and emerging loan problems?
  3. Is the financial institution’s loan administration software or system prompting action to be taken where warranted and documenting that action?
Find out about upcoming free lending/credit webinars
stay informed

Loan administration provides accurate, timely info

Throughout the life of a loan, it’s vital to have consistent and timely communication with the borrower and among financial institution team members. However, letters and emails to borrowers sometimes come from loan officers, but sometimes from other staff within the bank or credit union. Similarly, documents may be coming into the institution from many outside parties. Tracking and coordinating communication and documentation is important to make sure critical information is processed quickly. A sound loan administration solution or system will coordinate communication across the financial institution to reduce inefficiency.

Various parties also need access to data and the multitude of documents related to the loan, so it’s important that a loan administration solution or system provide that for these people – whether it’s for loan officers, managers, or external loan-review partners. How long does it take the financial institution to locate and produce documents now? Can people access data and documents wherever the staff are located? An effective loan administration solution creates a more coordinated, connected process for staff to access important documents and data much faster and easier.

Finally, loan documents and the data in them is highly confidential, so loan administration solutions should be designed with data security in mind. Paper-based loan administration systems leave financial institutions exposed to risks associated with physical damage and access to unsecured files.

Emily Larkin, Abrigo’s Chief Information Security Officer, recommends that financial institutions looking for a loan administration solution should seek a shared responsibility model with the hosting vendor that clearly lays out expectations and who is responsible for what. “The appropriate cyber protections and terms should be noted in the contract, and the vendor should highlight their cyber controls and commitment to follow regulations and laws within the contract,” she says.

Sound loan administration detects emerging problems

A loan administration solution or system should be able to provide on-demand reporting for exception, covenant, and document tracking to prevent and detect problem loans. Tracking exceptions in aggregate across the portfolio can point out holes in underwriting standards or compliance problems. Automated reporting ensures information is generated efficiently and can be reviewed regularly by management or examiners. Whether confirming collateral values or monitoring covenant compliance, financial institutions can better manage credit risk with a smooth, efficient loan administration process.

Loan administration systems that provide dynamic reporting by risk rating provide insight into portfolio risk. Being able to track changes in risk ratings and document them also satisfies examiners, so an effective loan administration solution makes that process easier.

Loan administration assists with accountability

Some regulations require specific work-completion timelines or specific actions that are taken during loan reviews or loan modifications, so documenting dates of client communications is critical. A sound loan administration system will make it easier to enforce timelines and workflows for improved accountability over paper files and calendars. Automated systems can also make it easier to provide consistent audit trails.

The coronavirus pandemic is prompting loan modifications and workouts, and businesses will continue to face uncertainty in the quarters ahead. Effective loan administration systems that help financial institutions stay on top of updated financials, covenants, collateral values, risk ratings, and other key loan information can them avoid expensive delinquencies and write-offs. Using a solution that automates reporting, tracking, and reminders for ticklers can reduce administration workload allows bank and credit union staff to have time for more value-added services, such as discussions with business owners about their businesses.

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

Full Bio

About Abrigo

Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

Make Big Things Happen.

 

Looking for Banker’s Toolbox? You are in the Right Place!

Banker’s Toolbox is now Abrigo, giving you a single source for all your enterprise risk management needs. Use the login button here, or the link in the top navigation, to log in to Banker’s Toolbox Community Online.

Make yourself at home!