Loan Quality: 10 Questions to Consider

Richard Sandenaw
July 14, 2008 | COMMENTS

As credit unions emphasize loan growth, it's important not to sacrifice portfolio quality.

Directors and staff should ensure lending policies and procedures provide:

• Adequate internal controls so employees follow underwriting guidelines as they work to increase loan volume
• Timely information so management can make midcourse corrections in procedures, underwriting, and training
• A quality control feedback loop

Consider these ten factors to assess your loan quality processes:

1. Loan policy. Are your lending procedures thoroughly documented and updated regularly? Are procedures for using the lending system documented and understood?

2. Staff training. Do staff understand loan policy, loan procedures, credit reports, underwriting, loan documentation, loan funding, system use, and loan setup?

3. Loan file check-in. Do you have a standard number of business days following funding by which loan files must be submitted for review? What happens if loan files sit in a lender's desk drawer for several days in need of just one detail, such as the borrower's signature?

4. Loan file review. Do you thoroughly review every loan file within one week of funding to ensure documents are complete? If there are missing documents or unsigned forms, what's done to complete the loan file? Who follows up on loan file completeness and accuracy?

5. Loan quality assurance sampling. Do you have an independent quality review of a random sample of all funded loans? The sample size should be at least 10% to 15%.

Do you sample other higher-risk loans? Are employee loans reviewed? Does senior management receive a monthly report on the loan reviews? Does the report include a summary of loan errors by lender and branch office? Is there a method for tracking trends by lender and branch office?

6. Collateral tracking. Do you routinely track receipt of missing documents, such as auto titles? Is someone checking the setup of loans on the loan servicing system to verify that pledged shares have been frozen? If errors have been made, does the individual lender or loan disburser get involved in the correction process? Is the branch manager aware of the types of errors lending staff makes?

7. Loan charge-off report. Do you review each loan on the report against the credit union's current underwriting guidelines? Would you make the same loan today? If you detect patterns, does someone follow up?

8. Loan review committee. Do you regularly evaluate reports generated by your loan process? If not, who oversees midcourse corrections? Do the CEO, lending manager, quality control auditor, branch managers, and collections manager actively participate in the meeting? Do you track loan quality factors by lender and auto dealer?

9. Loan underwriting review. Do you provide loan and credit report details to the CEO, lending manager, quality control auditor, branch managers, and collections manager? Does the discussion in the meeting focus on underwriting decisions? Do you allow for differences in judgment?

10. Loan underwriting authority. Does your program include a formal process for changing lending authority levels? Do you include a defined number of steps in addition to additional educational requirements and experience levels when considering promotions? Do you require training with a quality control auditor or in the collections department? Do you reduce lenders' authorities if their loans have a higher number of errors than permitted or if a high number of loans go delinquent?

Richard Sandenaw is managing partner of Strategic Mark in Rio Rancho, New Mexico, and a former credit union executive and board member. Contact him at 915-588-9024 or rsandenaw@strategicmark.org. This story first appeared at www.creditunionmagazine.com and is reprinted with permission.