A loan committee is an integral part of the lending or management hierarchy in banks and other financial institutions. Comprised of senior-level executives, this authoritative body evaluates and decides on loans that exceed the approval prerogative of initial loan officers, particularly those involving substantial amounts or higher risks. Ensuring adherence to the institution’s lending protocols, the loan committee authorizes the disbursement of loans upon satisfactory review.
Key Points to Remember
- Loan committees are constituted by senior management to greenlight loans that fall beyond the authority of initial loan officers, often due to large amounts or increased risk factors.
- These committees focus on ensuring that all loans align with regulatory standards, meet organizational lending policies, and fit within the firm’s risk appetite.
- Loan assessments involve scrutinizing factors like risk mitigation, the borrower’s credit score, previous repayment records, outstanding obligations, and current liquidity status.
- Key credit by the three major credit reporting agencies (Experian, TransUnion, and Equifax) aid loan committees in making informed decisions.
- Loan committees also outline recovery strategies for delinquent loans.
Insights into a Loan Committee’s Process
Loan committees are tasked with periodic reviews of the bank’s maturing loans—those nearing the end of their terms and potentially due for renewal. For instance, a 10-year loan moving into its ninth year qualifies as a maturing loan if the borrower wishes to extend it. While the original credit facilities might sometimes get extended, the loan committee reassures proper adherence to procedures. Ensuring the borrower’s creditworthiness remains intact over time is paramount.
Furthermore, they evaluate new loans that are sizeable, intricate, or carry elevated risks—these factors typically exceed the approval limits of standard loan officers and require senior management’s consent, including officers like the Chief Risk Officer (CRO) and the Chief Financial Officer (CFO).
Evaluating Loan Quality
In determining a borrower’s reliability, loan committees examine multiple facets: past repayment behavior, credit scores, asset-liability balance sheets, loan purposes, industry risks, and forecasting models. This comprehensive analysis helps them approve or decline the loan or potentially endorse it with modified terms to minimize potential risks.
The three major U.S. credit reporting agencies—Experian, TransUnion, and Equifax—furnish vital credit data, facilitating loan committees in their borrowing evaluations. These agencies assess attributes like payment history, total debt, duration of credit history, type of credit, and recent credit activities to compute an overall credit score.
Strategies for Loan Collection
When it comes to overdue loans, loan committees determine suitable collection methods based on institutional policies. After a missed due date, the committee might endorse action such as levying late fees or conceding a grace period.
For the borrower to restore their account’s standing, they typically must cover the minimum monthly payments, inclusive of any accrued late charges. Being chronically delinquent, often by 30 days or more, generally impacts the borrower’s credit report negatively.
Lastly, the loan committee bears the responsibility of ensuring the bank’s compliance with all relevant regulations, including lending protocols, bankruptcy and receivership matters, and even oversight of potential marketing content intended for customers.
Related Terms: Credit Facility, Chief Risk Officer, Chief Financial Officer, Credit Score, Credit Reporting Agencies
