Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
that reveal other unfavorable factors relative to a line
of credit.
• Collateral - Collateral evidencing a speculative loan
purpose or collateral with inferior marketability
characteristics (single purpose real estate, restricted
stock, etc.) which has not been compensated for by
other reliable repayment sources; and collateral of
questionable value acquired subsequent to the
extension of the credit.
LOAN APPRAISAL AND
CLASSIFICATION
Loan Appraisal
In order to properly analyze any credit, an examiner must
acquire certain fundamental information about a borrower's
financial condition, purpose and terms of the borrowing,
and prospects for its orderly repayment. The process
involved in acquiring the foregoing information will
necessarily vary with the size of the bank under
examination and the type and sophistication of records
utilized by the bank.
Because of the sheer volume of loans, it is necessary to
focus attention on the soundness of larger lines of credit.
Relatively smaller loans that appear to be performing
satisfactorily may ordinarily be omitted from individual
appraisal. The minimum size of the loan to be appraised
depends upon the characteristics of the individual bank.
The cut-off point should be low enough to permit an
accurate appraisal of the loan portfolio as a whole, yet not
so high as to preclude a thorough analysis of a
representative portion of total loans. This procedure does
not prevent an examiner from analyzing smaller loans
which do not show adequate amortization for long periods
of time, are overdue, are deficient in collateral coverage, or
otherwise possess characteristics which would cause them
to be subject to further scrutiny. In most instances, there
should be direct correlation between the cut-off point
utilized, the percentage of loans lined, and the asset quality
and management ratings assigned at the previous
examination.
The following types of loans or lines of credit should be
analyzed at each examination:
• Loans or lines of credit listed for Special Mention or
adversely classified at the previous FDIC examination
or State examination, if applicable as a result of an
alternating examination program;
• Loans reflected on the bank's problem loan list, if such
a list exists, or identified as problem loans by the
bank’s credit grading system;
• Significant overdue loans as determined from the
bank's delinquency list;
• Other significant loans which exhibit a high degree of
risk that have come to the examiner's attention in the
review of minutes, audit reports or other sources; and
• Loans to the bank's insiders, and their related interests
and insiders of other banks.
The degree of analysis and/or time devoted to the above
loans may vary. For example, the time devoted to a
previously classified loan which has been substantially
reduced or otherwise improved may be significantly less
than other loans. Watch list loans should initially be
sampled to assess if management’s ratings are accurate.
The reworking of certain loan files, such as seasoned real
estate mortgages, which are not subject to significant
change, should be kept to a minimum or omitted. This
does not mean that an examiner should not briefly review
new file information (since the previous examination) to
determine any adverse trends with respect to significant
loans. In addition, the examiner should review a sufficient
volume of different types of loans offered by the bank to
determine that bank policies are adequate and being
followed.
Review of Files and Records
Commercial loan liability ledgers or comparable subsidiary
records vary greatly in quality and detail. Generally, they
will provide the borrower's total commercial loan liability
to the bank, and the postings thereto will depict a history of
the debt. Collateral records should be scrutinized to
acquire the necessary descriptive information and to
ascertain that the collateral held to secure the notes is as
transcribed.
Gathering credit information is an important process and
should be done with care to obtain the essential
information, which will enable the examiner to appraise the
loans accurately and fairly. Failure to obtain and record
pertinent information contained in the credit files can
reflect unfavorably on examiners, and a good deal of
examiner and loan officer time can be saved by carefully
analyzing the files. Ideally, credit files will also contain
important correspondence between the bank and the
borrower. However, this is not universally the case; in
some instances, important correspondence is deliberately
lodged in separate files because of its sensitive character.
Correspondence between the bank and the borrower can be
especially valuable to the examiner in developing added
insight into the status of problem credits.
DSC Risk Management Manual of Examination Policies 3.2-39 Loans (12-04)
Federal Deposit Insurance Corporation