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Developing loan reviewer training: What personnel need for success

Dev Strischek
May 19, 2023
Read Time: 0 min

Loan reviewer training and development

What might a loan review curriculum look like and how can your financial institution develop good loan reviewers?

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

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Introduction

A few good men and women

In previous articles, we have explored the objectives of a loan review and credit risk review system in general. Let’s move on to another element of credit review systems—loan reviewer training.

As our annual loan review survey pointed out, loan review units have a severe workforce shortage at both the junior and senior levels. To make the workforce shortage even more critical, there is no real certification or formal loan reviewer training program yet. But many banks and credit unions find that booking loans with a loan origination platform offers their current staff greater functionality, mitigating or eliminating those staffing woes.  For smaller institutions especially, loan review software makes tracking productivity among teams, geographies, and other factors easier and more efficient. But while software can certainly help, it can't solve the talent shortage. How can banks and credit unions build up strong loan reviewers?

Mark Twain remarked, “I never let my schooling interfere with my education.” The annual loan review survey showed that schooling has most likely not interfered with loan reviewers’ education because departments lack funds to expend on loan reviewer training. Part of the reason for the lack of training may be the absence of any formal loan reviewer training resources, so why don’t we start thinking about what a loan review curriculum might look like?

The scope and depth of loan review

Loan review requires a "renaissance banker"

Loan review policies are typically reviewed and approved at least annually by the board of directors. Policy guidelines usually include a written description of the overall credit grading process and establish responsibilities for the various loan review functions. The policy generally addresses the following items:

  • Qualifications of loan review personnel
  • Independence of loan review personnel
  • Frequency of reviews
  • Scope of reviews
  • Depth of reviews
  • Review of findings and follow-up
  • Workpaper and report distribution.

So, what kind of qualifications should a loan reviewer have in order to meet the frequency, scope, and depth of reviews? What does a loan review need to have in order to review, evaluate, and follow up on findings? What kind of communication skills does a loan reviewer need in order to get those findings distributed and explained?

Qualifications for personnel

How much experience do junior loan reviewers need?

As Robert Frost observed, “education is hanging around until you’ve caught on.” But if you’re the new kid on the block, you haven’t been there long enough to catch on. So, the conundrum is that loan reviewers are expected to meet some minimum combination of education, experience, and training. They should be knowledgeable of both sound lending practices and their own institution’s specific lending guidelines. In addition, they should be familiar with pertinent laws and regulations affecting credit and lending activities. But what if the minimum expectations are set so high that it discourages wannabe loan reviewers?

There is a well-documented shortage of junior reviewers, which means loan review units need to recruit people short on education, training, and experience. Meanwhile, more senior staff are generally not getting their fair share of intermediate and remedial loan reviewer training. These challenges call for the development and implementation of some minimum but reasonable standard of education and training, so let’s put some suggestions on the table.

Junior loan reviewers ought to have basic credit and lending expertise, including:

  • Credit analysis including evaluation of cash flow, collateral, and guarantors
  • Underwriting basics such as minimum debt service coverage ratios, maximum collateral loan-to-value ratios,
    guarantor strength, evaluation of financial statement projections, maximum loan terms, and amortization
  • Commercial and commercial real estate loan documentation
  • Commercial loan operations for loan doc preparation, loan doc closing, booking, and funding
  • Basic compliance concepts such as spousal guarantees and real estate-related requirements

Relevant prior experiences would be as credit analysts, lending assistants, and/or any role in supporting business lenders in client support, prospecting, and credit requests for new and existing borrowers. These experiences help candidates understand the dynamics of commercial relationships and the interplay between lenders and the credit approval process. Some banks have enough critical mass to rotate junior teammates from credit analysis to workout to loan review for 6-month exposures to each of these areas before sending them on to lending assignments. The rotation assures them that they are not permanently assigned to any of these areas, but the exposure is long enough to give them some basic proficiencies. Yet another educational focus should include some basic statistics in valid sampling techniques to understand how loan review frequency, scope, and depth interplay.

Besides basic compliance requirements for business borrowers such as appraisal requirements, junior reviewers also need to be aware of accounting issues affecting borrowers—revenue recognition, lease capitalization, current expected credit loss, and troubled debt restructuring. Generally accepted accounting principles change over time, and regulations get revised, so loan reviewers need to be cognizant that accounting rules and regulatory rules are not engraved on stone tablets but are prone to change, too.

This is certainly not an exhaustive, complete list, but it is meant to get readers thinking about what you would revise, add, or delete from the list to move one step closer to actually implementing some basic curriculum. Keep in mind that the junior reviewer pool has been shallow because banks have generally preferred to recruit more experienced loan reviewers from other banks rather than try to build a junior layer to give senior loan reviewers more time to work on more challenging credit exposures.

A short list of training topics for senior loan reviewers might include:

  • Credit risk management and its role among the other enterprise risks
  • Merger and acquisition accounting given loan review’s frequent deployment on due diligence teams
  • Basic forensic accounting techniques to identify fraud
  • Current expected credit loss processes and loan loss reserve calculations, including the role of the risk rating
    systems in estimating loss via obligor probability of default and transactional loss given default
  • More advanced compliance issues and regulatory guidance

In addition, the regulatory agencies have concerns that have not been covered under formal guidance. 

Learn more about the impact of CFPB 1071 rule on small business lending 

Building a talent pool

Get serious about loan reviewer training

Comedian Steven Wright complained, “When I was in school, the teachers told me practice makes perfect. Then they told me nobody’s perfect, so I stopped practicing.”

Loan review management needs to scale back its expectations of pre-existing skills for new recruits and to take on more responsibility for training its own. That is not easy because of the dearth in training dollars, but senior loan reviewers should accept that if they want more support, they will have to shoulder more of a mentor responsibility. Loan review management needs to develop a basic loan review curriculum so that their senior loan reviewers are being given recruits acquainted with the basics.

Remember, this article is really aimed at getting you loan review managers thinking about what you want and need in education, training, and experience for your junior and senior loan reviewers. What do you think are essential topics for junior and senior loan reviewers? Use this matrix to help you focus on what you think junior and senior
loan reviewer training ought to include:

loan reviewer training

 

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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