Sunday, October 22, 2017

Where is the Document?

Posted by OnCourse Staff January 24, 2014 5:40pm

Photo Credit: stockphoto.net

By Aneel Eijaz, Senior Credit Risk Specialist

Loan File Organization

This is probably the most frequent question we ask bank personnel when the firm is engaged to review loan files. Each Community Bank has its own way of organizing loan files. Based on the type of loan and number of borrowers, these files can be very small, very large, or a combination of everything in between. On occasion, Banks use file folders, expanding files or file jackets and binders to organize the loan file. In our experience, we have visited Banks that have less than adequate filing abilities to Banks that we believe are the most and organized as far as their documentation process is concerned.

There are many benefits to keeping a loan file organized. Chief of which are:

  • A Bank can potentially save time and money by reducing the amount of hours required for Bank personnel or an external entity (i.e., auditors, reviewers, regulators) to review a loan file. A uniform documentation process will ease the flow of a review and give comfort to reduce the amount of questions asked
  • An organized, uniform loan file reduces the chances of an important loan document being misplaced, which can potentially cost the Bank additional resources to recover.
  • It enhances the overall efficiency of the file maintenance process, with documents such as Insurance, financials, etc.

In our engagements in various institutions, we see certain Banks that have loan files that are inclusive of both credit file documents and collateral documents. These files generally take more time to certain items, such as loan approval documents, the note, etc. The lack of organization and consistency in these loan folders can be a detriment to the loan review process, and can even lead to a mis-classification of a loan based on the availability of documentation on hand.

By contrast, the best filing system we have seen has been with institutions that utilize three part binders to organize a loan file into specific sections such as:  Credit/ Underwriting, Closing Documentation and Updates. The overall organization of the file is far more efficient.  By way of example, we noted that these files were organized as follows:

The Credit/Underwriting binder contained the initial and full credit approval memos along with financial information including PFS, tax returns, operating agreements, rent rolls, and lease copies. This area also contains the appraisal copies with Bank review forms attached and environmental copies. There is a section for credit reports as well. The sections are divided and labeled using a divider, which has its own numbers. To further the efficiency to show the contents of the file, each file contains an index that indicates the description of contents and divider number. The Closing Documentation binder contains loan closing documents starting with the signed and approved credit approval document along with a signed commitment letter. This file is most important as it contains the original copies of the loan closing documents with original signatures. The loan file also contains the other closing documents such as note, mortgage, disbursement, boarding data, system loan setup checklist, property insurance, recorded documents, etc. Additionally, these files can also be used to store copies of appraisals with their review forms and environmental reviews. The largest section is the title search information and other necessary documents such as deed copy, estoppel certificates, etc.

Finally, the Update binder is clearly labeled. After loan closing and after a certain time while the loan is performing, each commercial loan file requires constant monitoring that may include obtaining current property insurance certificates, current PFS, current tax returns, in-house financial statements, rent rolls, lease copies, etc. This section is also important because it is filled with current documents

Another filing/documentation approach we have noted by community banks is an electronic filing system whereby the loan files are scanned and incorporated within the Bank’s core service provider for easy indexing and searching. A common pdf format is used to store scanned loan documents. This approach limits the use of paper, which takes space and is a cost effective method. The original loan documentation may still need to be printed due to signatures. However, the follow-up to keep the portfolio loans current may be performed electronically all together. Another advantage of an electronic filing system is the easy integration of the current tax returns that are mainly submitted to the Bank electronically by many of the borrowers. If implemented correctly, the electronic indexing may also be used to track financial information and make the process of following up with borrowers significantly more cost efficient.

The important thing to keep in mind when migrating to an electronic filing system is that the underlying need to organize documents does not change whether the documents are a hard copy or scanned. Their organization and accessibility should remain the same. Loan file documentation can be either efficient or a nightmare of a process for both bank personnel and external reviewers.   The small effort that goes into organizing and storing a loan file properly can reduce additional complications and headaches down the road.

 

Comments

Add a comment

  • Required fields are marked with *.

If you have trouble reading the code, click on the code itself to generate a new random code.



 Image

OnCourse Staff

The OnCourse writing staff work to keep you informed about the most pertinent financial industry news of the moment



OnCourse Staff's Posts Subscribe to RSS Feed



Training – An Investment and Risk Management Tool
Are You Gambling with Your BSA Program?
Same Day ACH Credits – Phase One
Is the IRS Status of your Defined Benefit plan in Jeopardy?
Is your Institution Monitoring Working Capital Lines of Credit?
Financial Reporting and Regulatory Update on the Horizon
Planning in a Consolidating Banking Industry
To opt-out or not to opt-out, that is the question – A reminder on March 31, 2015 Call Report, Schedule RC-R, item 3.a
Cybercriminals Broaden their Attacks in Social Networks
The Importance of Segregating a Bank’s Credit Function from its Lending Function
Requesting Current Financial Information
Countdown to Windows XP End of Life and Support: Are you still at Risk?
314(b) Distinct Advantages for Financial Institutions
Where is the Document?
Do You Know The Security Features of the New $100 Bill?
Segregation of Duties for Wire Transfer Processing
Community Banks Slowly Warm Up to Private Student Loans
Has your Bank updated the Adverse Action Notice?
How Does Your Bank Handle Customer Requested Maintenance Changes?
OCC Releases Booklet on "Common Sense" Community Banking
New SAR Filing Updates
The Importance of BSA Training
FFIEC Proposed Risk Management Guidance on Social Media: Beware and Prepare
Pandemic Preparedness: Are you testing your Pandemic Plan?
FFIEC issues revised “Supervision of Technology Service Providers” booklet
Is Your Institution's Marketing UDAAP Compliant?
Electronic Work Papers - Why P&G Made the Switch
Community Lenders Seize Market Share From Big Banks by Using Advanced Online Lending Technology
New FinCEN Guidance for CTR Aggregation for Businesses with Common Ownership (FIN – 2012 –G001)
Curry: Operational Risk Now OCC’s Top Concern
JOBS Act Client Alert - Rules 506 of Regulation D
Wall Street Receives Volcker Rule Clarity
De-stressing with stress testing
Banks Participate in Information Sharing to Battle Online Theft
IT security: Is your program still effective?
Mobile banking: How do we get there?
UBS further struggles with $2 Billion loss by Rogue Trader
Capital One Becomes Dodd-Frank Test as Nation’s Fifth Largest Bank
Community Banks to receive US Funding for Small Businesses
FDIC fields questions about overdraft guidance
Negligent Hiring – A mistake can cost more than just money!
From Embezzlement to Imprisonment: Former Citigroup employee faces charges with $19.2 million in bank fraud
Finding the Right Hire
Model behavior: Is your ALM model capturing your bank’s risks?
ALLL best practices: Pay attention to qualitative factors
Abandoned Property Law, and its new New York State of Mind
FDIC releases Provisions on Dodd-Frank to help Community Banks
Social Media in the Employment Arena – It Gets Funky!
Banks and Businesses get "swiped" over Fees
A little bit of this, and a little bit of that: Fed Unveils list of Banks Helped during Financial Crisis of 2008
To Test or Not to Test; That is the Question
2011 Failed Bank List Hits 25
Committee on Financial Services to Hold Hearing on the Effects of Dodd-Frank on Small Biz and Banks Today
2011 Failed Bank List up to 18
The Test Drive: Leasing or Buying a HR IT Platform
Double Digits: Bank Closings up to 11 in 2011
FCIC Releases Report on the Causes of the Financial Crisis
Another One Bites the Dust: Regulators Close 4 Banks
On Notice: FDIC Issues Rule for Temp Unlimited Deposit Insurance
2011 Failed Bank List Up to 3
Stick 'Em Up!
Time for a Tune-Up: The Necessity of a HR Audit
Visa Instituting Two-Tiered Debit Card Interchange Structure
The First Failed Banks of 2011
The Law on Your Side: Understanding HR Regulations in 2011
No Respite from RESPA