How to Improve Your Commercial Underwriting Process

If bankers learned anything from the Great Recession, which is now over a decade in our collective rearview mirrors, it’s this:

In both good and bad economic times, bankers must keep a watchful eye out for risks in their loan portfolios.

The high level of vigilance required to keep a close watch out for risks can be difficult to maintain, especially when the economy is on a 10+ year incline. Anyone who’s been in banking for any length of time can link strong economic times to less stringent underwriting requirements and loan policies, diluted credit and loan procedures and relaxed oversight. Bankers are human, and it’s human nature to become complacent when all is going well. Bankers also are dealmakers, and easing requirements and restrictions in commercial underwriting is a way to close more deals and reduce oversight expenses.

Yet, it is during the “good” years, that it’s most important to stay vigilant about credit risk management and loan portfolio management. Our economy is a perpetual cycle, and a downward turn will occur—no question about it. When it will happen is speculation. Next year? The year after? No one knows. What you and every banker can control is how prepared your bank is to weather it.

To improve your commercial underwriting process and help ensure your financial institution is in a constant state of readiness for whatever the economy brings, identify common problems in commercial underwriting and assess how your executive lending team solves for them. Of course, it’s never too late to start evaluating and assessing, but annually is ideal.

How is your bank approaching credit risk management?

This speaks to your bank’s overall credit culture, and culture tends to trickle from the top down. When it comes to managing credit risk, is your executive lending team crossing the t’s and dotting the i’s? Or are they making decisions based on gut feelings and hunches? If the latter, then your bank is at risk for loan charge offs when the economy begins to decline and diminishing the quality of your loan portfolio.

Can an executive lending team accurately and objectively assess the culture they lead? Probably not. It’s a wise investment to bring a third party to conduct an evaluation.

Are you reviewing loan policies for changes over time?

It’s normal for loan policies and requirements to change, whether due to industry regulations or internal executive decisions. In fact, if you looked at the changes on a timeline, you should be able to correlate a change in policy to when a specific regulation took effect or the date your board of directors or an executive officially directed a policy change. That means you’re keeping credit risk in check.

If your policies definitely are or feel more lax, yet there is no official event that justifies it, take it as an indication that the change is putting your institution at risk. Fewer restrictions result in more (and not necessarily quality) loans being funded.

Maintaining standards that are independent of economic fluctuations is a fine balance. In the best scenario, your institution’s loan policies are consistent to minimize risk, yet result in your credit committee approving a higher number of quality loans.

Are you effectively and consistently managing your loan portfolio?

Even though loan portfolios are constantly evolving, how your team manages the portfolio’s risk and rating matters. Identifying and monitoring credit risk and setting credit risk rating levels is a consistent task, and encompasses the following:

  • Managing documentation and credit exceptions quickly, especially in era when even mortgages can be applied for and approved online using a smartphone. Missing or incomplete documentation can prevent making the correct decision and increase credit risk.
  • Identifying and adjusting, if necessary, high concentrations of credit risk in an industry or from a borrower. Diversify if high concentrations are present to lower credit loss risk.
  • Reviewing and evaluating your debt collection and workout policies and procedures. When the economy begins to decline, which it will someday, having effective past due and problem credit management policies and procedures in place minimizes credit losses.

Is your credit management system as effective as possible?

The three cornerstones of an effective credit management system are that it:

  1. Quickly and efficiently assists your organization’s lending staff and operations with underwriting and identifying credit risk.
  2. Tracks and assists with collecting loan and financial documentation exceptions.
  3. Provides effective and timely past due collection and problem loan administration and reporting.

It’s easy to overlook either not having a credit management system at all or a poorly functioning one when all is right in the economy.

However, when the economy takes a turn for the worse, the last thing you want your team spending time on is managing a risk-heavy loan portfolio, nor do you want to make the investment in a credit management system. The time to invest in and implement a robust credit management system is when you don’t necessarily think you need one.

How experienced is your lending staff?

In a perfect world, your lending staff includes younger members who’ve not personally experienced the effects of a devastating economic downturn and credit losses, as well as senior members who’ve ridden their share of ups and downs.

Having a mix of both helps avoid making uninformed credit decisions that create a risk-laden loan portfolio, and also helps getting stuck in a rut of doing things and using the technology that’s always been used. When you have a clear view of your team’s collective experience, you can better tailor training and policies to strengthen your position against credit risk.

Is your institution ready for the next recession?

Answering the above questions helps lending teams better monitor the quality of new loans by identifying areas of complacency and loose underwriting policies. Knowing where the risks to your institution are hiding is how any bank or credit union can be ready for the next recession, regardless of when it happens.

Learn more about how Suntell’s Square 1 Credit Risk Management Software can improve your commercial underwriting process.

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