Effective loan administration will protect margins and balance sheets at banks over the next year as financial institutions handle the effects of the pandemic-induced economic crisis. In any economy—but especially in the current one where borrowers’ financial situations are changing or highly uncertain—financial institution loan administration systems deserve a checkup and, in some cases, an overhaul. Prudential regulators have made it clear that while they will adjust supervisory strategies as appropriate to emerging risks of the pandemic, examiner scrutiny will continue assessing basic principles that ensure the safety and soundness of financial institutions.
Loan administration is a basic and yet far-reaching process of lending. A smooth, effective loan administration process is like the defensive line against unnecessary loan losses, given that it impacts operations from the time a loan is approved until it is off the bank’s books. Likewise, weak loan administration can lead to a blitz on margins—especially when unnecessary expenses collide with interest-rate pressures.
The sophistication of a loan administration system, of course, depends on the size of the institution and staff, as well as the complexity of its portfolio. As a result, some variations in processes and loan administration systems among banks is expected. However, effective loan administration solutions or systems will help lenders avoid the most common documentation- and data-related deficiencies found during examinations. They will incorporate capabilities to address needs that can generally be grouped into three questions:
- Does the loan administration software or system capture or generate accurate, timely information in a secure environment?
- Does the loan administration software or system enable the financial institution to analyze that information/data and detect existing and emerging loan problems?
- Is the financial institution’s loan administration software or system prompting action to be taken where warranted and documenting that action?
Loan Administration Provides Accurate, Timely Information
Throughout the life of a loan, it’s vital to have consistent and timely communication with the borrower and among financial institution team members. However, letters and emails to borrowers sometimes come from loan officers, but sometimes from other staff within the bank. Similarly, documents may be coming into the institution from many outside parties. Tracking and coordinating communication and documentation is important to make sure critical information is processed quickly. A sound loan administration solution or system will coordinate communication across the financial institution to reduce inefficiency.
Various parties also need access to data and the multitude of documents related to the loan, so it’s important that a loan administration solution or system provide that for these people—whether it’s for loan officers, managers or external loan-review partners. How long does it take the financial institution to locate and produce documents now? Can people access data and documents wherever the staff are located? An effective loan administration solution creates a more coordinated, connected process for staff to access important documents and data much faster and easier.
Finally, loan documents and the data in them are highly confidential, so loan administration solutions should be designed with data security in mind. Paper-based loan administration systems leave financial institutions exposed to risks associated with physical damage and access to unsecured files.
Emily Larkin, Abrigo’s chief information security officer, recommends that financial institutions looking for a loan administration solution should seek a shared responsibility model with the hosting vendor that clearly lays out expectations and who is responsible for what. “The appropriate cyber protections and terms should be noted in the contract, and the vendor should highlight its cyber controls and commitment to follow regulations and laws within the contract,” she says.
Sound Loan Administration Detects Emerging Problems
A loan administration solution or system should be able to provide on-demand reporting for exception, covenant and document tracking to prevent and detect problem loans. Tracking exceptions in aggregate across the portfolio can point out holes in underwriting standards or compliance problems. Automated reporting ensures information is generated efficiently and can be reviewed regularly by management or examiners. Whether confirming collateral values or monitoring covenant compliance, financial institutions can better manage credit risk with a smooth, efficient loan administration process.
Loan administration systems that provide dynamic reporting by risk rating provide insight into portfolio risk. Being able to track changes in risk ratings and document them also satisfies examiners, so an effective loan administration solution makes that process easier.
Loan Administration Assists with Accountability
Some regulations require specific work-completion timelines or specific actions that are taken during loan reviews or loan modifications, so documenting dates of client communications is critical. A sound loan administration system will make it easier to enforce timelines and workflows for improved accountability over paper files and calendars. Automated systems can also make it easier to provide consistent audit trails.
The pandemic is prompting loan modifications and workouts, and businesses will continue to face uncertainty in the quarters ahead. Effective loan administration systems that help financial institutions stay on top of updated financials, covenants, collateral values, risk ratings and other key loan information can them avoid expensive delinquencies and write-offs. Using a solution that automates reporting, tracking and reminders for ticklers can reduce administration workload allows bank staff to have time for more value-added services, such as discussions with business owners about their businesses.
Mary Ellen Biery is senior staff writer and content specialist at Abrigo. She works with advisors and other experts to develop whitepapers, original research and other resources that help financial institutions drive growth and manage risk. A former equities reporter for Dow Jones Newswires whose work has been published in The Wall Street Journal, Washington Post and on Forbes.com, Biery is a frequent author in banking, credit union and accounting publications.