How to build a loan review function that helps your business grow

Steve Krase, Giulio Camerini
How to build a loan review function that helps your business grow

Whether your financial services company is starting up an independent loan review function or enhancing an existing department, the goal should be the same. Your organization needs to verify that underwriting and portfolio management comply with regulatory expectations, internal policies, procedures, and guidelines – but that’s only a baseline for adequacy. You also want to create a program that reflects the company’s risk appetite and gives the board of directors, audit committee, and senior management confidence that credit risk is appropriately managed.

In many cases, loan review directors who are trying to understand the operations and challenges of their department as well as the bank’s portfolio might feel pressure to dive in and start reviewing the portfolio right away – and that’s when things get choppy. Once engrossed in the day-to-day of credit risk review, it’s easy to get trapped in a cycle.

Before you know it, you’re six months in, and you haven’t performed a comprehensive assessment of your loan review program or portfolio risks. Organizations easily can get trapped in inefficient, ineffective processes, and loan review directors might wonder why their team isn’t more productive.

By establishing the proper groundwork for your loan review function first, you can create a department that’s more effective and more valuable to the organization. 

Rely on carefully defined policies and procedures to build a successful, independent loan review function.

Rely on carefully defined policies and procedures to build a successful independent loan review function.

Whether you’re building a new loan review function or enhancing an existing department, your policies and procedures should support your long-term vision. These policies and procedures set the foundation for the entire department, and they’ll define your approach for your first baseline year until you review them again.

At a minimum, your policies and procedures must satisfy regulators. You can refer to the Interagency Guidance on Credit Risk Review Systems for an overview of regulatory expectations. However, keep in mind that these guidelines are intentionally broad and open to interpretation because they’re drafted by multiple agencies and apply to a wide range of financial services companies.

To create a loan review function that will assist business growth and help assess and monitor credit risk, consider how loan review functions operate at successful peer organizations and gather best practices that you can apply to your department. But as you bring in awareness of what other banks are doing, also understand that no off-the-shelf model for loan review exists. The best approach for your loan review department depends on your company’s size, geography, risk appetite, management structure, and lending types.

Remember to ask what larger risk management efforts might be underway in the organization that your loan review function can use. Too many loan review departments view their work in a silo and spend time on work that overlaps heavily with activity in another area of the bank. If your people focus on work that doesn’t even need to be completed, you might struggle to meet production goals.

Ask where your loan portfolio is concentrated and what that means for risk management.

Ask where your loan portfolio is concentrated and what that means for risk management.

Once you’ve built a solid foundation by writing your policies and procedures, you can assemble a new team or evaluate your existing team. And just like with policies, the right team looks different at every organization.

To figure out your staffing needs, analyze your loan portfolio and identify areas of risks. Each type of lending presents its own risk profile and might require experience to review.

Ask questions such as:

  • Where are the dollars concentrated in our portfolio?
  • Do we have both commercial and consumer loans?
  • Are there segments of the portfolio that are deemed high risk – historically, recently, or on an emerging basis?
  • Do we have new loan products?
  • Are any segments or industries experiencing recent growth?
  • Are there specialty or niche products in the portfolio?
  • Do we have recently acquired portfolios that are underwritten and managed differently? 

A comprehensive risk assessment can help identify what you need to review and what capabilities your department requires. Your assessment should identify your loan review coverage for your annual plan or review period and help you understand all the loan types in your portfolio.

After performing the risk assessment, estimate the volume of loans a reviewer can complete on a daily basis (remembering to account for related tasks such as planning, sampling, and reporting) to determine the size of the team required. Ideally, you want a team built around loan review analysts who have hands-on experience with the loan types that define your portfolio.

Identify any gaps in your team’s skill set and find ways to fill them.

If you’re lucky, you’ll assess the capacity and capabilities of your team to find you have the perfect people in place (or the budget to hire those people, if you’re creating a department). More likely, you’ll find some areas where your available resources don’t quite match your needs and have to decide how to address those areas.

If the gaps are small and your team has some degree of experience, comprehensive procedures might be enough for your analysts to successfully review key types of products. Or, you might be able to lean on software tools that can instruct your analysts. 

However, there is no substitute for deep expertise. You might want to address your capacity and experience shortfalls through hiring, outsourcing, cosourcing, or some combination of the three. Unless you consistently need a full-time employee and can find someone with the exact skill set you want, it might be wise to look for a third party that can provide staff augmentation for the areas of the portfolio where your team lacks experience. Outsourcing with a third party also allows you to build your team on a more structured timeline, which helps avoid hasty hiring decisions.

Make sure you have the right tools in place.

Make sure you have the right tools in place.

Every loan review program needs to satisfy regulators’ expectations, and regulators look for consistent documentation. When team members start with blank word processing documents and apply their own preferences and experience in terms of methodology, consistency becomes almost impossible to achieve. And even when a reviewer assesses risk ratings and credit quality perfectly, it can be hard to support those results without proper documentation that shows the reviewer’s reasoning and methods.

With dedicated, scalable loan review software in place, you can get your entire credit risk review team on the same page and using the same processes. Not only that, but software automation can provide enormous time savings, which is critical in the production-driven world of loan review.

Manually pulling and aggregating data from different word processing documents and spreadsheets is not a good use of an experienced loan review specialist’s time. Automating processes frees up your best people to work on what matters, which is critical when you’re trying to build a loan review function that supports your organization’s business goals and growth initiatives.

Let Crowe technology help your loan review team do its best work.

Crowe credit and loan review specialists worked with our technology team to create Crowe Credit360 for Loan Review Departments – the innovative, scalable loan review software that’s built by loan reviewers for loan reviewers. Before we brought this solution to market, our own loan review team spent a decade using and refining it. And we continue to make it better with updates and enhancements.

To learn more or schedule a no-obligations demo, visit the Crowe Credit360 for Loan Review Departments webpage.

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Steve Krase
Steve Krase
Principal, Financial Services Consulting
Guilio Camerini
Giulio Camerini
Principal, Financial Services Consulting