Poll: Vast majority of bankers still manually create credit memo
A credit memorandum is meant to summarize the information collected during the loan application and credit analysis processes. This large document bridges the gap between underwriting and funding, and it is a pivotal point in the life of the loan. A credit memorandum is used by the loan committee to decide whether or not to approve a loan and disburse funds to a borrower.
It is easy to see how the credit memo can become extremely complex given the amount of data coming from disparate sources that must be cohesively combined. Credit analysts and lenders compile information like financial ratios, global cash flow analysis, the assigned risk rating, proposed loan pricing, terms of the proposal and borrower information into one, large file. Depending on the type of loan and documentation requirements, the credit memo can be up to 50-60 pages long.
What’s surprising is that most banks and credit unions are still manually creating credit memos by copying and pasting information from previous documents and those disparate data sources. In a recent poll during a Loan Presentation webinar, 84 percent of bankers indicated that they manually create each credit memo, while only 16 percent indicated they use an automated solution or process.
Is manual data entry a problem for banks and credit unions?
Though the process may have worked for the institution to-date, manually drafted credit memorandums can create two vulnerabilities for the institution: efficiency and data integrity.
Manual data entry can create a significant bottleneck at the approval stage of the loan process – a time when borrowers are most anxious. In the current market where interest rates are at an all-time low, financial institutions are under pressure to decrease loan approval times or quicken decisioning. By doing so, the institution can more effectively compete on customer service, instead of price. Automating credit memo creation could shave several days off the loan approval process, which not only improves that borrower’s experience – it also gives the institution’s lenders more time to facilitate other, new loans for the institution.
Manual data entry can also lead to an increased risk of errors and can impact the accuracy of data used in the decision making process. When lenders and credit analysts have to type or copy and paste a significant amount of data into the credit memo, it is a tedious task and susceptible to transposed numbers or skipped lines. In the best case scenario, errors are caught during validation, and the analyst or lender will have to go back and edit the document, which leads to slower turnaround times. In the worst case scenario, the loan committee makes a decision based on incorrect information. That puts the institution at risk to approve deals that are too risky for those terms, or it can cause the institution to miss out on opportunities that should have been booked.
As more financial institutions turn to technology to innovate processes and reduce risk, lending departments are likely to implement an automated solution to generate the credit memo. To learn more about creating an effective credit memorandum, including what information should be included, watch the on-demand webinar “Loan Presentation Best Practices: How to improve your credit memo and loan presentation process”.