Determining a loan review scope is the foundation of an effective loan review process. No matter how skilled your analysts are, if they aren’t looking at the right data, they may not be adding value; they may just be restating the obvious.
What should a loan review scope include?
What does a properly defined loan review scope consider? It should account for:
- Current market conditions
- External factors that may affect a borrower’s current or future ability to repay
- Whether the sample is representative of the portfolio as a whole
- Whether the sample provides reasonable assurance that credit quality deterioration or unfavorable trends will be identified
Common loan review scope challenges
Analyzing a loan portfolio from multiple perspectives can reveal both obvious and emerging risks. However, three common challenges often limit effective loan review scoping: data limitations, organizational silos, and reliance on exposure thresholds.
Data limitations
Loan review can only scope based on the data your teamhas and how that data is presented. Missing data elements, such as NAICS codes, or poor data quality can make it difficult—sometimes impossible—to build a useful scope. This isn’t a minor inconvenience; it can affect the quality of the review. Making a business case for loan review automation is a good first step toward efficiency.
Organizational silos
Loan review scope is often constrained by how the bank is organized. Many institutions present data by market, cost center, or region, with each essentially its own island. For example, if cattle lending occurs across four markets, reviewing it holistically requires manual effort to piece together a universe from which to draw a sample. Most loan review teams don’t have the luxury of this extra work. As a result, targeted loan reviews often don’t happen.
Threshold limitations
Penetration thresholds—such as reviewing 40% of exposure in an area—may sound good on paper, but they can focus attention on size instead of risk. The largest exposures may receive the most review even if other segments present greater risk or the loans already receive scrutiny elsewhere. Meanwhile, risky segments can go unnoticed if they fall outside the threshold.
How can your team build a risk-focused loan review scope?
A well-equipped loan review team should be able to create queries that cut across organizational structures and build focused views of the institution’s loan data, such as:
- Borrowers rated 5 or 6 with new credit above a certain threshold in the last 12 to 18 months
- Borrowers downgraded to 5 or 6 above that threshold in the same timeframe
- A random sample of downgraded borrowers below the threshold
- Major concentrations, such as agriculture, regardless of where loans are booked or how they’re coded
- Segments where exposure has grown rapidly, such as 10% to 15% or more in 12 to 18 months
- Borrowers rated Special Mention for more than 12 to 18 months, given that this is a transitory rating typically meant to last no more than four to six quarters
If your team can’t generate these queries—or doing so takes excessive manual effort—your institution may be a strong candidate for automation using loan review software. The right tool won’t just make scoping more efficient; it can help uncover patterns, speed up the review cycle, and improve portfolio insight.
Close the loop after setting the loan review scope
Selecting loans for review is only one part of a useful loan review scope. Institutions should also address findings and follow-up procedures, such as how results are communicated to leadership and the board. The Interagency Guidance on Credit Risk Review Systems states that the effective credit review concludes with “discussion of the review findings, including all noted deficiencies, identified weaknesses, and any existing or planned corrective actions (including time frames for correction) with appropriate loan officers, department managers, and senior management.”
After a review, keep a record of the loans or segments reviewed, the review dates, and the information supporting assigned risk ratings. Share significant findings with the appropriate staff and management. For issues that need corrective action, record the planned response and track its status. If a rating difference arises, use the institution’s established process to resolve it. When relevant, communicate unresolved weaknesses to management and, as appropriate, the board.
Recording and reporting these details helps connect individual loan reviews to portfolio oversight. It gives decision-makers a clear account of what the review found and what action followed. Then, as the portfolio or its risk indicators change, the team can consider whether review scope or frequency should change as well. That makes the scope useful beyond selecting a sample: it supports a consistent process for documenting, communicating, and acting on review results.
What a modern loan review scope can uncover
In 1999, the loan review team I worked on installed the DiCOM loan review platform, now part of Abrigo’s software suite. For the first time, we could evaluate lending segments independently of the bank’s organization. At the time, we were structured by market, with cattle lending spread across four markets. Before DiCOM, we reviewed cattle loans only as part of those individual market reviews because that was how the data was structured.
Once freed from that limitation, we conducted a focused cattle lending review. We found meaningful differences in underwriting and monitoring practices across markets. That allowed us to make best-practice recommendations that improved consistency and performance across all four markets. It also demonstrated that loan review could be more than an oversight function; we became active contributors to risk management.
We then expanded that approach to other segments, cutting across lines and discovering new patterns that no one else had on their radar. The results? Better recommendations, higher impact, and more meaningful engagement with risk.
It amazes me that, even today, many financial institutions still scope reviews based on outdated structures, just accepting the hand they’re dealt. That’s no longer necessary. If you’re still scoping through spreadsheets, you’re doing your institution a disservice.
If you’re still scoping loan reviews like it’s 1985, you’re not just behind the times; you’re undermining your institution’s risk management. It’s time to modernize your process and start scoping like the future of your portfolio depends on it—because it does.
