When it comes to effectively reviewing loan portfolios and making sure all your ducks are in a row, one of the most important entities is the FDIC. As you likely know, the FDIC (Federal Deposit Insurance Corporation) is the entity when it comes to identifying, monitoring and addressing any risks to financial institutions and their deposits. It oversees all areas of banking, from the deposits made, to how the funds are handled, to loans and everything in-between. As loans are a credit risk, it is of the utmost importance that financial institutions do what they can to mitigate any risks when it comes to approving loans. Every single loan policy that comes through the bank must adhere to regulations put in place by the FDIC, which can be tricky business.
In order to help you ensure compliance when it comes to your loan portfolio review process, this blog will overview what the FDIC is, what its role is in regulating loans, and what objectives an effective loan review process should address, per the FDIC.
Who is the FDIC?
Created in 1933 in response to all the bank failures of the Great Depression, the FDIC insures all deposits made in banks for at least $250,000. Since it was established, no depositor has lost a single penny due to a failure or collapse. Employing more than 7,000 people, the FDIC examines banks for compliance with a series of consumer protection laws, such as the Fair Credit Billing act, the Fair Credit Reporting Act, the Truth-In-Lending Act and the Fair Debt Collection Practices Act. Compliance with all of these acts (and more) is critical to a bank avoiding failure.
Why It May Be Time for A Loan Review ‘Tune Up’
When you look at everything the FDIC is in charge of, it becomes more apparent than ever just how important they are. It is in place to ensure all financial institutions are operating with ‘risk tolerances,’ which isn’t always as easy as it sounds. It is no secret that today’s lending environment is both challenging and competitive, which is why those in the business must do everything they can to mitigate risks and ensure they are in compliance with the FDIC. With this in mind, many financial institutions would benefit from a loan portfolio review “tune up,” which simply means bringing in an outside vendor to go over your loan practices and make sure the following is in place:
- Up-to-date policies
- A system to pinpoint any warning signs or red flags
- A system to identify the adequacy of an institution’s loan policy
There are numerous different objectives that an effective loan review process should address, which we will go over in the next section.
What Objectives Should an Effective Loan Review Process Address?
In order to truly understand the importance of an effective loan portfolio review process, it is necessary to go over the various objectives that a loan policy should address. This is a critical element of risk management examinations, as it is this process that will uncover any red flags and ensure the institution is in compliance. Here is a brief overview of what areas and objectives every single loan review process should address:
- All aspects of lending
- Lending authority of loan officers and committees
- Identify loans with credit problems
- Identify any relevant trends and how they may impact the collectability of the loan
- Evaluate actions of the lender
- Assess adherence to loan policies
- Present findings to senior management
Each institution should have internal guidelines in place pertaining to the loan portfolio review process in addition to the regulations from the FDIC. For more information on the role of the FDIC during the loan review process and how this impacts lenders, please check out this infographic, along with our latest ebook, Is Your Vendor Minimizing Risk to Your Loan Portfolio?