While loan servicers and their staff are busy in the day-to-day management of the institution’s loan business, when it comes to effectively reviewing loan portfolios and making sure the institution is compliant and mitigates risks, one of the essential entities is the Federal Deposit Insurance Corporation (FDIC). As you likely know, the FDIC is the entity involved when it comes to identifying, monitoring, and addressing any risks to financial institutions and their deposits.
While the bank or credit union oversees its customers’ business, the FDIC oversees all areas of the institution’s business, from the deposits made, to how the funds are handled, to loan origination and servicing 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 their risks when approving loans. Every loan policy that comes through the bank must adhere to regulations put in place by the FDIC, which can be tricky, especially as loan departments are often overworked and understaffed.
To help you ensure compliance in 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 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 these acts (and more) is critical to a bank avoiding failure.
Time for A Loan Review ‘Tune Up’
When you look at everything the FDIC oversees, it becomes more apparent how important they are. It is in place to ensure all financial institutions operate 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 comply 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 while your staff focuses on their jobs:
- Up-to-date policies
- A system to pinpoint any warning signs or red flags
- A method 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 a Loan Review Process Address?
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, which can be time-consuming for you and your staff. However, 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—Does management accurately identify, monitor, and reserve for credit risk?
- Lending authority of loan officers and committees—Do loans meet the regulatory standards, the bank’s policies and satisfy the credit risk levels of the institution?
- Identify loans with credit problems—Is portfolio quality satisfactory, considering trends in past dues, nonaccrual, charge-offs, adverse classifications, and the overall risk profile?
- Evaluate actions of the lender—Do the board and senior management effectively supervise this area?
- Assess adherence to loan policies—Has the methodology used to measure the expected collectability of the loan been defined and adhered to?
Finally, The review process should:
- Identify any relevant trends and how they may impact the collectability of the loan
- Present findings to senior management
To make sure your staff can stay on top of the loan process between reviews, each institution should have internal guidelines in place for the loan portfolio review process in addition to the regulations from the FDIC.
Not sure where to start with these complex guidelines? Connect with Info-Pro here to discuss the impact of the loan review process on the institution, your staff, and your customers.