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:
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.
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