16 14 What is loan review How should a loan review be conducted Loan review is

16 14 what is loan review how should a loan review be

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16-14. What is loan review? How should a loan review be conducted? Loan review is a process of periodic investigation of outstanding loans on an institution's books to make sure each loan is paying out as planned, all necessary documentation is present, and the bank's loan officers are following the institution's loan policy. While lending institutions today use a variety of different loan review procedures, a few general procedures are followed by nearly all lending institutions. These include: 1. Carrying out reviews of all types of loans on a periodic basis. 2. Structuring the loan review process carefully to make sure the most important features of each loan are checked.
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3. Reviewing the largest loans most frequently. 4. Conducting more frequent reviews of troubled loans. 5. Accelerating the loan review schedule if the economy slows down or if industries in which the bank has made a substantial portion of its loans develop significant problems. Loan review is not a luxury but a necessity for a sound lending program. It not only helps management spot problem loans more quickly but also acts as a continuing check on whether loan officers are adhering to a bank's loan policy. For this reason, as well as to promote objectivity in the loan review process, many of the largest institutions separate their loan review personnel from the loan department itself. Loan reviews also aid senior management and the bank's board of directors in assessing the overall exposure to risk and its possible need for more capital in the future. 16-15. What are some warning signs to management that a problem loan may be developing? Problem loans are often characterized by reduced communication between borrower and lender, delays in receiving financial reports, evidence of reevaluations of assets (such as inventory or pension-plan assets), declining stock prices, changes in management, or the restructuring of other loans the borrower has taken out. 16-16. What steps should a lender go through in trying to resolve a problem loan situation? The most important first step is to move quickly to contact the borrower, to ascertain if the borrower understands the nature of the loan problem, to explore for creative solutions to the problem, and to get the borrower to reach a decision on the best solution possible. 17-1. What special problems does business lending present to the management of a business lending institution? While business loans are usually considered among the safest types of lending (their default rate, for example, is usually well below default rates on most other types of loans), these loans average much larger in dollar volume than other loans and, therefore, can subject an institution to excessive risk of loss and, if a substantial number of loans fail, can lead to failure. Moreover, business loans are usually much more complex financial deals than most other kinds of loans, requiring larger numbers of personnel with special skills and knowledge. These additional resources required increase the magnitude of potential losses unless the business loan portfolio is managed with great care and skill.
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  • Fall '16
  • Thu Trang
  • Debt, Financial services, Mortgage loan, Deposit account

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