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:
- Does the loan administration software or system capture or generate accurate, timely information in a secure environment?
- Does the loan administration software or system enable the financial institution to analyze that information/data and detect existing and emerging loan problems?
- Is the financial institution’s loan administration software or system prompting action to be taken where warranted and documenting that action?