Weaknesses in the shift from CRE to C&I
In the ever-changing banking climate, financial institutions continue to build their commercial and industrial (C&I) portfolios in addition to their historical involvement in commercial real estate (CRE) lending. As a result, many have recognized the need for training to improve their credit department’s expertise in this area of lending. These institutions have also hired experienced personnel, developed credit models and prepared business analyses with varying degrees of success.
There is, however, an area within this type of lending that has been given little or no attention, according to a recent article by consulting firm CEIS Review. Legal documentation, along with building and maintaining structure appropriate to non-CRE loans, has been a major weak spot for institutions. Over time, a lack of focus in this area could result in portfolio losses or regulatory concerns.
So what can be done to address the issues within C&I lending? Many institutions that had a focus on CRE have long-standing relationships with law firms to document and close their loans. Unfortunately, many of those firms lack expertise in C&I, and are “unfamiliar with SEC issues and bank regulation issues outside of real estate lending,” according to the article. It is suggested that banks involved in C&I seek out law firms with significant experience in C&I lending. While some institutions may already be doing this, CEIS also recommends training of all involved personnel, including senior management, in documentation of C&I loans. This will become critical as the bank or credit union begins to do business with larger and more sophisticated borrowers.
For more on these weaknesses and how to address them, read the full article by CEIS.
For more information on the shift from CRE to C&I lending, download the whitepaper, Shifting Credit Concentrations: 6 Ways to Prepare.