Effective credit memos are organized
An organized credit memo helps reviewers and approvers quickly understand the request and make an informed decision. That starts with a clear summary at the top of the memo.
“Most people that read these things are going to make a decision within a few minutes,” Kirby noted. “I want the decision up at the top. What do you want me to do?”
A summary of the background usually follows, and the contents of that section should be fitting to the risk being considered. Kirby also recommended structuring memos around key building blocks, especially for more complex deals. These include:
- Purpose of the loan and how it will be repaid
- Risks to repayment and mitigation strategies
- Borrower’s and bank’s backup plans (plan B)
- Management capabilities and controls
- Industry considerations and borrower positioning
- When relevant, performance projections and covenants. (For example, if the financing transaction will result in a risk rating downgrade of two grades or more, use covenants to show how the company will return to the previous rating.)
Finally, the risk rating and final recommendation are critical components of the credit memo. The rating for a loan should represent the sum of the earlier information and analysis provided. It’s “an objective assessment of what you have said in your credit memo,” Kirby said.
He emphasized that not every memo requires every section to be equally robust. The content should expand or contract based on the deal’s risk and complexity.
How technology helps
Credit memos can easily become complex given the amount of data coming from disparate sources. Manually creating those credit memos by copying and pasting information from previous credit memos can create two types of vulnerabilities for an institution: efficiency and data integrity.
Automating the creation of credit memos eliminates what can be a major bottleneck at the approval stage. Sharing days off the approval process translates into a better experience for customers or members and more time for credit analysts to facilitate additional loans.
In addition, loan origination software that automatically feeds relevant information into the memo avoids errors that can arise from manual data entry. The last thing a bank or credit union wants is to make a decision based on incorrect information.
Getting to “just right”
Credit memos play a critical role in risk management and credit decisioning. But they shouldn’t be an exercise in verbosity or regulatory appeasement.
“This is not a ritual to satisfy the supervisors,” Kirby reminded attendees. “It’s an important, integral part of the banking business.”
By focusing on clarity, conciseness, relevance, and good organization—rather than tradition or boilerplate—credit analysts can develop memos that better support both credit decisions and long-term portfolio performance.
