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Considering the scope and depth of loan review roles and processes

Dev Strischek
May 19, 2023
Read Time: 0 min

How to evaluate loan review processes based on their scope and depth

A closer look at loan review can help your institution determine what steps to take to please regulators and streamline processes.

You might also like this webinar, "Return to basics: Asking the right credit risk questions."

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Scope and depth

Why use scope and depth to discuss loan review?

Considering the scope and depth of your financial institution’s loan review process is a great way to identify gaps in training and create more efficient operations. But what are scope and depth, and how do they apply to roles and loan review processes at your bank?

In a banking context, the scope is the number of different operations you do on the job and the frequency with which you do them. For example, if you work in a factory assembly line putting doors on cars, you are doing one specialized task repeatedly, so the scope of your job is low. On the other hand, if you rotate between putting doors on cars, putting seats in cars, and checking the steering mechanism, your scope is high because your job has less frequent repetition and more variation.

Depth is the amount of control you have over your tasks. Low-depth roles adhere to strict guidelines, and employees have very few decisions to make. Usually, jobs involving mass production through assembly lines have low depth. On the other hand, high-depth jobs typically include many decisions and allow employees to set their own pace. Most actors’ careers are high-depth. They are given parts and told to interpret the characters and lines in their own way. You would also have high depth if you were given a project within your company and told to develop it at your own pace. Servers taking food orders, bringing drinks, and talking with their customers have a broader scope than dishwashers in the kitchen. Knowing the scope and depth of a specific job can help fill it with the right person to carry out the required tasks.

Due to the varying scope and depth of each position within an organization, some employees will be more capable and better suited to complete certain responsibilities than others. But how does this apply to loan reviewers? How broad a field does loan review need to plow to unearth potential credit risks and assess overall credit quality?

Scope in loan reviewing

What is the scope of an adequate loan review?

The interagency guidance on credit review systems says that comprehensive and effective loan reviews cover all segments of the loan portfolio that pose significant credit risk or concentrations and other loans that meet certain institution-specific criteria. This certainly qualifies loan review as a high-scope activity. The guidance expects the scope to consider current market conditions (soaring lumber and construction materials prices, the pandemic, cybercriminals shutting down oil pipelines) that may impact a borrower’s current or future ability to repay the loan.

The guidance also calls for establishing an appropriate review scope to ensure that the sample of loans selected for review, or portfolio segment chosen for review, represents the portfolio as a whole and provides reasonable assurance that any credit quality deterioration or negative trends are identified. The guidance expects the credit risk review function to consider industry standards consistent with the institution’s size, complexity, loan types, risk profile, and risk management practices.

The institution’s board of directors typically approves the scope of the credit risk review annually or whenever significant interim changes are made to adequately assess the current portfolio's quality. What does the regulatory guidance expect on depth?

Loan review evaluation

Measuring the depth of transaction or portfolio reviews

The guidance notes that loans and portfolio segments scoped for review should be evaluated for credit quality, soundness of underwriting and risk identification, borrower performance, and adequacy of the sources of repayment.

When applicable, this evaluation includes the appropriateness of automated underwriting and credit scoring, including prudent use of overrides, as well as the effectiveness of account management strategies, collections, and portfolio management activities in managing credit risk. Some additional factors to evaluate include:

  • Reasonableness of assumptions
  • Creditworthiness of guarantors or sponsors
  • Sufficiency of credit and collateral documentation
  • Proper lien perfection
  • Proper approvals consistent with internal policies
  • Adherence to loan agreement covenants
  • Adequacy of and compliance with internal policies and procedures, such as those related to nonaccrual and classification or risk rating policies, laws, and regulations
  • The appropriateness of credit loss estimation for those credits with significant weaknesses, including the reasonableness of assumptions used and the timeliness of charge offs
  • The accuracy of risk ratings and the appropriateness and timeliness of the identification of problem loans by loan officers

 

This list certainly qualifies loan review and creating a loan review report as a high-depth job. Performing the items on this list requires more than a familiarization, overview, or introduction to each topic. It calls for detailed knowledge, considerable practice, and extensive experience to develop the skills needed to perform loan reviews of this depth.

Watch a video on how loan review helps financial institutions achieve growth goals.

Deep and wide

A diagnostic checklist for loan reviewers

One of the difficulties of loan review management is finding, training, and retaining this talent level. As our annual loan review survey pointed out, loan review units have a severe workforce shortage at the junior and senior levels.

To make the workforce shortage even more critical, there is no real certification or formal training program for loan reviewers yet. For those loan reviewers who would like to compare their guidance on depth with the guidance, here is a handy checklist to diagnose yourself.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan review managers have developed numerous ways to expedite the excavation, e.g., differentiation between performing loans with no delinquencies, defaults, and overdrafts vs. borrowers with excessive past- dues, covenant defaults, and overdrafts.

Having all booked loans on a loan origination platform offers loan review analysts functionality that can mitigate or eliminate those difficulties.  If staffing is a challenge, loan review software makes tracking productivity among teams, geographies, and other factors easier and more efficient. In addition to providing more efficient credit risk review, a loan review solution can provide other analytics to elevate loan review’s profile or support staffing requests.

Ralph Waldo Emerson wrote, “It is not the length of life but the depth of life.” Loan officers should examine their processes’ scope and depth and consider how much their resources can support while meeting regulatory expectations.

Learn more helpful information in this on-demand webinar, "Create and maintain a successful loan review function."

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About the Author

Dev Strischek

Principal
A frequent speaker, instructor, advisor and writer on credit risk and commercial banking topics and issues, Dev is principal of Devon Risk Advisory Group and engages in consulting, speaking and training on a wide range of risk, credit, and lending topics. As former SVP and senior credit policy officer at

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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