Problem Loan Reports
One of the main topics of conversations with bankers these days is documenting credit files with problem loan reports. Often loan officers discuss problem credits at weekly/monthly meetings; however, comments from those meetings are not always documented in the respective credit files. We believe it is extremely important to ensure that those comments are placed in the loan files or in a centralized binder for reviewers’ access.
Some institutions prepare problem loan reports for classified loans within a certain threshold only. Others also include criticized loans within the same threshold. Some institutions update problem loan reports monthly. Other institutions update the reports every quarter.
What to Document
Whether is monthly or quarterly, for classified loans only or for criticized and classified loans; there are several matters that should be documented within those problem loan reports. Even though comments do not need to be extensive, there are key topics that need to be included:
History of the Borrower & Nature of the Business
- A brief narrative section describing the loan purpose, history of the borrower, and nature of their business operation (if any), should be included in the report. It helps the reader better understand the transaction.
Date and Reason for Classification
- The date the loan was downgraded should be documented together with the reason for the downgrade. Some institutions also include who originated the downgrade (examiners, internal loan review, external loan review, loan officer).
- This is probably the most important section within the report. It should include benchmarks and trigger dates. Is the institution planning on working with the borrower to resolve the weaknesses or is the institution planning on exiting the credit?
- Some institutions include a brief section that shows cash flow analysis. Trends are analyzed and documented.
- The collateral securing the loan should be included together with the most current value. We encourage updating collateral values for classified loans annually to support the carrying value of the collateral.
- If the loan is considered impaired and a specific reserve is necessary, include the calculation in the report. Some institutions use specific software for impairment calculations, in which case the schedules should be attached.
- Since the problem loan reports may only be updated monthly or quarterly, the loan officer may need to document events that occur more frequently. A comment section can be updated even daily. Include the date and the officer’s initials.
In summary, management should establish a threshold for preparing problem loan reports and determine the frequency that those reports should be prepared. Those reports are beneficial not only for third-party reviewers but for any bank personnel that may need to review the credit and understand the current status. Problem loan reports should be placed in the individual credit files for easy access or kept in a centralized binder.