Lending is an inherently complex and at times risky business that requires attention to detail, commitment, and dedication. As more and more people head to their local bank in the hopes of being approved for a loan or mortgage (thanks in large part to record low interest rates), we are seeing more of a need than ever for smart loan portfolio review practices. While many don’t realize just how important the loan review process is, lenders sure do. From making sure a loan portfolio is in compliance with internal policies and federal regulations, to keeping an eye out for any potential red flags or credit weaknesses, a lot goes into this process.
The Role of the Lender
Over the last several years the loan portfolios of small and large institutions alike have rebounded from the recession, which is huge when it comes to revenue. This is why it is more important than ever that lenders are doing everything they can to ensure the success of a loan portfolio. From closely adhering to internal and federal regulations to outsourcing certain services to a knowledgeable third-party vendor, the role of the lender in this process is critical. Today there is a heightened focus on the loan review process, making it essential that those in the industry understand what goes into an effective loan review process. In addition to outsourcing certain services (such as real estate tax monitoring and flood determination), the following practices should be adopted during the loan review process:
This is probably the most important factor in an effective and thorough loan portfolio review process, and directly ties into the role of an outside vendor. When it comes to the loan review process, it is absolutely imperative that it is done with independence and objectivity. With this in mind, it may be a good idea to outsource this process to a vendor. If so, the loan review personnel will be able to assess the portfolio and communicate their findings with the lending team. Focusing on objectivity will go a long way in this process, as it will allow you to pinpoint credit weaknesses and other red flags that need to be addressed.
Commitment and Support from Management
Having the support and commitment of senior management is also key to an effective loan portfolio review process. In order for a financial institution to grow and succeed, there must be a shared culture of commitment and support, and this stretches down to every area of the company, including the loan review process. Adherence to internal and federal regulations is huge—and this needs to come from senior management in order to be effectively implemented organization-wide.
Scope of Review
Finally, the loan portfolio review process should be as in-depth as possible. Before getting started, make sure that everyone is on the same page in regards to scope of review and what is being included. If this is not clearly defined, you may find yourself in some trouble down the road. All parties involved in the review process should have a clear picture of what is expected before the process begins.
The loan portfolio review process in itself is absolutely critical to a bank's overall performance. In order to ensure your loan review practices are effective and in compliance with all regulations, and to learn more about this topic, please download our latest ebook, Is Your Vendor Minimizing Risk to Your Loan Portfolio?