Loan review: Continuous monitoring vs. targeted monitoring

As noted above, some financial institutions utilize an ongoing process for monitoring credits as a screening method to narrow down and prioritize the pool of loans that will be targets of exam reviews. As they perform targeted exams, loan reviewers routinely select from the bank or credit union’s pools of new loans and loans exceeding a specific size. But some loan reviewers worry that sampling only these categories might leave important gaps. By conducting limited credit assessments before making selections for a targeted review, staff can uncover credits that infrequently get selected for a loan review exam but nevertheless might pose a potential, immediate risk to the institution.

Kirby said another benefit of continuous monitoring is that it could lead to more interaction with loan officers and others in credit — a plus as more banks and credit unions move to remote work. Improved communication helps more people understand the role and importance of the loan review process, he added.

“In my day, you had to go out and look loan officers in the eye to conduct a loan review,” he said. “Now you’re in your cubicle with your work and your pictures of your kids, and you can just do the review.”

Regulators have highlighted the importance of credit risk review to provide ongoing feedback on lending processes and support accurate estimates for the allowance for credit losses (ACL) or the allowance for loan and lease losses (ALLL).

As stated in the 2020 Interagency Guidance on Credit Risk Review Systems, an effective credit risk review system:

• Provides for the review and evaluation of an institution's significant loans, loan products, or groups of loans
• Provides this review and evaluation typically annually, on renewal, or more frequently when internal or external factors indicate a potential for deteriorating credit quality or the existence of one or more other risk factors
• Can provide useful continual feedback on the effectiveness of the lending process to identify any emerging problems

In addition, the guidance says, “Ongoing or periodic review of an institution's loan portfolio is particularly important to the estimation of ACLs or the ALLL because loss expectations may change as the credit quality of a loan changes.”

How to identify credits for continuous monitoring

Identifying loans for limited reviews typically incorporates information and resources outside of financial statements. Credit review staff at the conference said they often leverage line-of-business data, external data, conversations with partners across the enterprise, as well as loan review software in their efforts. Loan review experts said they might review exception reporting on loans above a specific size, market assessments, demographics, and trend data to identify potential, immediate threats.

A survey-based workflow works well for some institutions to help reviewers quickly determine whether the credit looks good or needs more work.

One conference attendee described how such a workflow provides a first pass at loans. The survey asks a loan reviewer about various details, such as the age of the latest business financials, and the answers move them through a decision tree. Credits needing additional scrutiny receive targeted reviews involving deeper dives into the underwriting as well as regulatory and policy compliance. Meanwhile, those that don’t require a full review are still studied.