1、Chapter SixteenLending Policies and Procedures:Managing Credit RiskKey Topics Types of Loans Banks and Competing Lenders Make Factors Affecting the Mix of Loans Made Regulation of Lending Creating a Written Loan Policy Steps in the Lending Process Loan Review and Loan WorkoutsIntroduction However,ri
2、sky or not,the principal reason many financial firms are issued charters of incorporation by state and national governments is to make loans Lenders are expected to supply credit for all legitimate business and consumer financial needs and to price that credit reasonably Loans support the growth of
3、new businesses and jobs within the lenders market area Loans frequently convey information to the marketplace about a borrowers credit quality The lending process bears careful monitoring at all timesTypes of Loans Real Estate Loans Financial Institution Loans Agriculture Loans Commercial and Indust
4、rial Loans Loans to Individuals Miscellaneous Loans Lease Financing Receivables The largest category in dollar volume is real estate loans,followed by loans to individuals,and commercial and industrial(C&I)loansTABLE 161 Loans Outstanding for All FDIC-Insured Banks as of December 31,2010(consolidate
5、d domestic and foreign offices)Types of Loans(continued)Factors Determining the Growth and Mix of Loans Characteristics of the market area Lender size Wholesale lenders vs.retail credit Experience and expertise of management Loan policy Expected yield of each type of loan Regulation General rule:A l
6、ending institution should make the types of loans for which it is the most efficient producerRegulation of Lending The mix,quality,and yield of the loan portfolio are heavily influenced by regulation Examples of lending regulations:The total volume of real estate loans granted by a U.S.national bank
7、 cannot exceed that banks capital and surplus or 70 percent of its total time and savings deposits,whichever is greater An unsecured loan to a single customer normally cannot exceed 15 percent of a single national banks unimpaired capital and surplus account(legal lending limit)Any loans made are su
8、bject to examination and reviewRegulation of Lending(continued)The Community Reinvestment Act of 1977 Selected lenders to must make“an affirmative effort”to meet the credit needs of individuals and businesses in their trade territories so that no areas of the local community are discriminated agains
9、t in seeking access to credit The Equal Credit Opportunity Act of 1974 No individual can be denied credit because of race,sex,religious affiliation,age,or receipt of public assistance The International Lending and Supervision Act Requires U.S.banks to make public any credit exposures to a single cou
10、ntry that exceed 15 percent of their primary capital or 0.75 percent of their total assets,whichever is smaller This law also imposes restrictions on the fees lenders may charge a troubled international borrower to restructure a loanRegulation of Lending(continued)Uniform Financial Institutions Rati
11、ng System Each banking firm is assigned a numerical rating based on the quality of its asset portfolio The federal examiner may assign one of these ratings:1=strong performance 2=satisfactory performance 3=fair performance 4=marginal performance 5=unsatisfactory performance Regulation of Lending(con
12、tinued)Asset Quality Criticized loans Scheduled loans Adversely classified loans Substandard loans Doubtful loans Loss loansRegulation of Lending(continued)CAMELS Rating Capital adequacy Asset quality Management quality Earnings record Liquidity position Sensitivity to market risk exposure All six d
13、imensions of performance are combined into one overall numerical rating,referred to as the CAMELS rating Depository institutions whose overall rating is low tend to be examined more frequently than the highest-rated institutionsRegulation of Lending(continued)Establishing a Good Written Loan Policy
14、Important in order to meet regulatory standards What should a written loan policy contain?A goal statement for the entire loan portfolio Specification of lending authority of each loan officer and loan committee Lines of responsibility in making assignments and reporting information Operating proced
15、ures for soliciting,evaluating and making loan decisions Required documentation for all loansRegulation of Lending(continued)Establishing a Good Written Loan Policy Lines of authority for maintaining and reviewing credit files Guidelines for taking,evaluating,and perfecting loan collateral.Procedure
16、s for setting loan rates and fees and the terms for repayment of loans A statement of quality standards applicable to all loans A statement of the preferred upper limit for total loans outstanding A description of the lending institutions principal trade area Procedures for detecting and working out
17、 problem loan situations.Steps in the Lending Process1.Finding Prospective Loan Customers2.Evaluating a Customers Character and Sincerity of Purpose3.Making Site Visits and Evaluating a Customers Credit Record4.Evaluating a Prospective Customers Financial Condition 5.Assessing Possible Loan Collater
18、al and Signing the Loan Agreement6.Monitoring Compliance with the Loan Agreement and Other Customer Service NeedsCredit Analysis:What Makes a Good Loan?1.Is the Borrower Creditworthy?The Cs of Credit Character Specific purpose of loan and serious intent to repay the loan Capacity Legal authority to
19、sign binding contract Cash Ability to generate enough cash to repay loan Collateral Adequate assets to support the loan Conditions Economic conditions faced by borrower Control Does loan meet written loan policy and how would loan be affected by changing laws and regulationsCredit Analysis:What Make
20、s a Good Loan?(continued)2.Can the Loan Agreement Be Properly Structured and Documented?This requires drafting a loan agreement that meets the borrowers need for funds with a comfortable repayment schedule If a major borrower gets into trouble because of an inability to service a loan,the lending in
21、stitution may find itself in trouble Proper accommodation of a customer may involve lending more or less money than requested over a longer or shorter periodCredit Analysis:What Makes a Good Loan?(continued)3.Can the Lender Perfect Its Claim against the Borrowers Earnings and Any Assets That May Be
22、Pledged as Collateral?Reasons for Taking Collateral If the borrower cannot pay,the pledge of collateral gives the lender the right to seize and sell those assets It gives the lender a psychological advantage over the borrower Types of Collateral Accounts Receivables Factoring Inventory Real Property
23、 Personal Property Personal GuaranteesEXHIBIT 161 Safety Zones Surrounding Funds Loaned in Order to Protect a LenderTABLE 164 Sources of Information Frequently Used in Loan Analysis and Evaluation by Lenders and Loan Committees Parts of a Typical Loan Agreement The Promissory Note Loan Commitment Ag
24、reement Collateral Covenants Affirmative Negative Borrower Guaranties or Warranties Events of DefaultLoan Review1.Carrying out reviews of all types of loans on a periodic basis2.Structuring the loan review process Record of borrower payments Quality and condition of collateral Completeness of loan d
25、ocumentation Evaluation of borrowers financial condition Assessment as to whether the loan fits with the lenders loan policies3.Reviewing Largest Loans Most Frequently4.Conducting More Frequent Reviews of Troubled Loans5.Accelerating the Loan Review Schedule if Economy or Industry Experiences Proble
26、msLoan Workouts Loan workout the process of recovering funds from a problem loan situation Warning Signs of Problem Loans1.Unusual or unexpected delays in receiving financial statements2.Any sudden changes in accounting methods3.Restructuring debt or eliminating dividend payments or changes in credi
27、t rating4.Adverse changes in the price of stock5.Losses in one or more years6.Adverse changes in capital structure7.Deviations in actual sales from projections8.Unexpected or unexplained changes in depositsTABLE 165 Warning Signs of Weak Loans and Poor Lending PoliciesLoan Workouts(continued)What st
28、eps should a lender take when a loan is in trouble?1.Do not forget the goal:Maximize full recovery of funds2.Rapid detection and reporting of problems is essential3.Loan workout should be separate from lending function4.Should consult with customer quickly regarding possible options5.Estimate resour
29、ces available to collect on loan6.Conduct tax and litigation search7.Evaluate quality and competence of management8.Consider all reasonable alternatives Preferred option:Seek a revised loan agreementQuick Quiz Why is lending so closely regulated by state and federal authorities?What is the CAMELS ra
30、ting,and how is it used?What three major questions or issues must a lender consider in evaluating nearly all loan requests?Explain the following terms:character,capacity,cash,collateral,conditions,and control.What sources of information are available today that loan officers and credit analysts can use in evaluating a customer loan application?What is loan review?
