The Importance of Monitoring Incremental Deviations from Credit Policies

While most banks are on top of monitoring and managing their policy exception rates, they may be missing a whole other level of risk if they are not also identifying and managing exceptions to standard operating procedures (SOPs) or credit administration practices. Ask yourself this: Are those SOPs being followed as rigorously today as they were a few years ago? How often are they being waived or ignored? And how can you be sure?

While trackable policy exceptions are highly visible and trends easy to see, they only tell part of the story. The reality is that non-tracked deviations from standard underwriting without meaningful mitigants, and a lack of proper administration of loans, can be big contributors to a loan portfolio’s losses. Perhaps the following questions might get the thought process started:

  • Are all conditions precedent being met before closing your loans?
  • Are all post-closing conditions (if any) being cleared within the required time frame?
  • When you get quarterly financial statements, receivables, agings, etc., are you actually reviewing them, assessing performance, and reporting the results? Or are you just sending them to the file without reviewing, analyzing, and circulating them to the appropriate internal parties?
  • If you elect to take on additional risk and fund receivables when a clear concentration is evident, are you doing so at the same rate or a reduced advance rate? Is accounts receivable insurance being employed to help manage that risk?
  • Are guarantees from entities or individuals whose liquidity and other assets make them judgment-proof given the same credence as guarantors whose liquidity and assets are not shielded from the bank?
  • Are limited guarantees being accepted more frequently?
  • Are limited guarantees being accelerated sufficiently to account for lack of financial wherewithal of some of the guarantors? (Examples would be a 150% pro rata ownership percentage guarantee, a 200% pro rata ownership percentage guarantee, etc.)
  • Are you verifying guarantor liquidity against bank and brokerage statements with the same frequency you used to?
  • Are you tracking past-due insurance? When notice of expiration or cancellation is received, is someone on top of it, providing notice of an event of default and either force-placing insurance or getting the client to reinstate immediately?
  • Are covenants looser, tested less frequently, or perhaps not even required?
  • Are trade reference checks being performed?
  • Is “know your customer” due diligence being performed regularly? Are identified issues being surfaced?
  • When you receive your covenant compliance certificates from your client each quarter, are you going through each covenant and performing your own independent calculations for compliance? Or are you just taking the results at face value and not checking the math independently?
  • Are call memos being prepared consistently and with meaningful content?
  • Are managers reviewing the call reports and keeping up with client changes, trends, and issues?
  • When a financial statement or a covenant is waived, is proper notice being sent to the client explaining that this is a one-time waiver and all other terms and conditions remain in effect?
  • Are you getting estoppels from the existing tenants when financing income producing real estate?
  • Are you reviewing leases and addressing potential issues in your underwriting—for example, going-dark, co-tenancy, lack of attornment, etc.?
  • Are you tracking past-due real estate taxes? If the taxes are past due, are you immediately providing notice of an event of default and requiring the client to immediately bring taxes current?
  • Has the number of waivers for bonding on real estate construction projects increased?
  • Is there an increase in the number of times you are not getting third-party engineering firms’ property condition reports when financing real estate?

This is just a sample of the important underwriting or administration issues that might not be showing up on a report monitored each month. If the frequency with which these standard practices are not being followed has been increasing incrementally, that’s the cumulative effect contributing to “boiling the frog.”

The above is based on an excerpt from The RMA Journal, October 2017 article “Don’t Be Like the Boiled Frog” by Frank DiLorenzo, senior vice president in enterprise risk management at SunTrust Bank. You can read the article in its entirety here.

Risk Appetite and Exceptions - Exception Tracking and Management

Read More

Washington – The Week Ahead, November 12-16, 2018

Read More

NPR Implementing Section 205 of the Economic Growth, Regulatory Relief, and Consumer Protection Act

Read More

comments powered by Disqus