Review Steps

Loan discussions are important to obtain and verify information about a credit union’s commercial lending program and individual loans. Team members should provide sufficient information to support the loan review and classification (risk ratings).

A working draft of loan review comments and or exceptions should be provided to credit union management early in the process and on a flow basis to allow management sufficient time to clear or cure any identified deficiencies, or offer corrective action plans to clear or cure the exceptions.

The following scope item examples are provided to serve as a tool for examiner reference:

Action Taken to Correct Prior Commercial Lending Examination Issues

  • Review management’s actions to correct concerns related to the commercial lending program identified in prior contact reports
  • Document any corrective actions (or lack of action) in the Scope workbook, DOR Status module, Supplementary Facts, or as otherwise directed by the EIC

Written Plans, Policies and Procedures

  • Review credit union’s strategic plan (or business plan) addressing the commercial lending program, including any line of business, products or services, growth plans etc. For more information, see Board of Directors and Management Responsibilities and NCUA regulations part 723, Member Business Loans; Commercial Lending (Preamble)
  • Review commercial loan policies and written procedures, including any policy or procedure related to business lending (such as risk rating matrix, appraisal, environmental, collections, TDR, workout, modifications, servicing and/or loan administration etc.) and complete the Commercial Loan Policy and Regulation Review Checklist [under development]
  • Review the loan participation policy and determine if it complies with the requirements of NCUA regulation § 701.22, Loan participations, and complete the Participations Checklist [under development]
  • Review loan participation agreements to determine if they comply with the requirements of NCUA regulation § 701.22(d) and complete the Participations Checklist [under development]
  • Review the policy and procedures for processing loan applications, managing the pipeline, underwriting, making recommendations, closing and funding process to determine they are reasonable and commensurate with established risk tolerance levels established by the board—for more information, see Commercial Loan Administration
  • Review the policy concentration limits, rationale supporting the limits, compliance with the limits, and appropriate reporting of the credit union’s concentration risk position to the board of directors—for more information, see Board of Directors and Management Responsibilities and Commercial Loan Policy
  • Review the current pricing strategy for all commercial loan products and services; obtain a list of fees and charges associated with business loans and determine if pricing strategies align with the institution’s growth and profitability strategies
  • Review any CUSO and other commercial lending service provider relationships with the credit union, and document the type of products and services provided; assess the credit union’s initial due diligence for new relationships and ongoing due diligence for established relationships—for more information, see NCUA Letter to Credit Unions 08-CU-09, Evaluating Third Party Relationships Questionnaire.

Sample of Commercial Loans (Selection Procedure)

Exam staff should base the commercial loan review sample on the portfolio size, complexity, trends, and overall perceived risk. Examiners should use judgment when determining the focus and extent of a loan review sample. The review sample should be of sufficient size and scope to enable a reviewer to reach sound and well-supported conclusions about the quality of, and risk management over, the commercial loan portfolio.

In a stable, well-managed credit union that has few signs of change, examiners should sample a smaller number of new and pass-rated credits to determine the continued adequacy of loan quality and credit risk management. When risks are elevated, examiners should expand the scope of their review activities to ensure that credit union management has appropriately identified, measured, monitored, and controlled risk. Elevated risks may include:

  • Identification of problems in prior exam reports
  • Size and complexity of the commercial loan portfolio
  • Significant portfolio growth
  • Changes in loan product mix, strategic direction, or key personnel
  • Economic deterioration
  • Other significant issues or problems

Examples for the review sample include:

  • Large-dollar commercial loans
  • Loan participations (in whole or part) purchased and sold
  • Loans sourced or originated through brokers and other third parties
  • Significant loan concentrations (to a single borrower or group of associated borrowers, by industry or type)
  • Borrowers with government guarantees (SBA, FSA, USDA, etc.)
  • C&D loans
  • Unsecured loans
  • New loans in new loan products and in seasoned products or portfolios experiencing rapid growth
  • Insider loans and loans to affiliates
  • Loans with lower credit risk ratings (pass and watch)
  • Loans previously identified as structurally weak
  • Loans with exceptions to lending policies and underwriting standards
  • Higher-risk lending products
  • Loans or lending concentrations such as industries exhibiting signs of weakness or higher risk geographical areas.
  • Loans on the problem loan list
  • Loans previously classified
  • Significant past-dues, nonaccruals, troubled debt, modified, under a workout plan, and restructured loans

Document Review

exam staff should review credit approval memorandums for appropriateness. These memos should be a standard format to ensure a consistent, complete, and fair evaluation of credit for all applicants. They should be commensurate with the size and complexity of each credit facility, and must contain sufficient information for the approval authority to make a fully informed decision. For more information, see Credit Approval Document

  • Assess the financial analysis within the credit approval memos to determine if decisions are sound and well supported—for more information, see Financial Analysis
  • Ensure unsecured, unguaranteed, and high loan-to-value loans are well mitigated—for more information, see Personal Guarantees and NCUA regulations part 723, Member Business Loans; Commercial Lending (Preamble)
  • Ensure management has assigned credit risk ratings that match the potential for loss—for more information, see Credit Risk Rating
  • Document technical exceptions, credit administration weaknesses, and regulatory violations, and discuss any concerns with the appropriate staff—for more information, see Commercial Loan Administration

Lending Department (Staffing)

  • Review the organization chart that shows the structure of the commercial lending department and identify and discuss any changes in key management or staff in the commercial area since the last examination
  • Determine whether the structure and staffing levels are appropriate based on the size and complexity of the commercial lending activities. Assess whether the separation of duties is appropriate to prevent any potential conflicts of interest. For more information, see Board of Directors and Management Responsibilities, and NCUA regulation part 723, Member Business Loans; Commercial Lending (Preamble)
  • Review a list of individuals with authority to approve business loans, including dollar amount of approval limits for all business loan types; determine if the approval process and delegated authority is appropriate. For more information, see NCUA regulations § 723.4(e), Board of Directors and Management Responsibilities, and the preamble to 723, Member Business Loans; Commercial Lending (Preamble)
  • Review loan committee or similar minutes and documents that contain narratives on individual business loan recommendations/approvals, modifications, or other actions since the last examination, and comment on review results
  • Review resumes for all individuals involved in the processing, approval, and monitoring of business loans (detailing specific business lending experience)
    • Determine if staff have adequate expertise for the types of commercial lending in which they engage. If a credit union’s board and/or management team does not possess the experience, skills and resources to manage commercial loans, the credit union should refrain from making such loans until it does. For more information, see NCUA regulations 723, Member Business Loans; Commercial Lending (Preamble)
    • If applicable, review a copy of the loan incentive or bonus plan, along with policies and detailed listing of incentives/bonuses paid since the last exam; assess the credit union’s compliance with NCUA regulation § 701.21(c)(8)

Risk Management and Reporting

  • Review a list of commercial loan borrower/guarantor concentrations to determine if they comply with regulatory and internal policy limits—for more information, see NCUA regulations § 723.4(c) and Associated Borrower
  • Review a summary report of commercial loans by industry/type (NAICS code) to verify they comply with internal policy limits; discuss trends or concentration concerns—for more information, see NCUA regulations § 723.4(a) and Commercial Loan Administration
  • Identify and review all commercial lending reports that are provided to the board of directors—for more information, see § 723.4, Commercial loan policy, and Commercial Loan Administration
    • At a minimum, reports should include loans approved with exceptions, unsecured loans, unguaranteed loans, and other compliance monitoring relative to policy limits.
  • Review the commercial loan risk ratings reports (including any participations and historical trends) and determine how they are used and reported to the board of directors; calculate the adversely classified items ratio—for more information, see Commercial Loan Administration
  • Review any other risk management reports that are prepared (such as by geographic location, rate structure, or LTV migration)
  • Review any reports generated to show risk composition/trends and risk management processes for the commercial loan portfolio. Comment on the results of the review.
  • Review and assess any other credit quality surveillance activity
  • Review government guaranteed programs and determine if servicing is sufficient to ensure the guarantee is retained (SBA, FSA, USDA, etc.)

Monitoring

  • Determine if loan relationships receive timely ongoing reviews in accordance with part 723, Member Business Loans; Commercial Lending
    • Periodic reviews should be completed at least annually and should include updated cash flow and financial analysis, a reassessment of the risk rating, status of covenant compliance status, documented site visits, collateral inspections/reevaluations, and field audits if applicable; problem loans should be reviewed more often
    • Frequent communication with a borrower will allow the credit union and borrower to establish a plan of action to improve the likelihood of repayment—for more information, see Commercial Loan Administration and the preamble to NCUA regulations part 723, Member Business Loans; Commercial Lending (Preamble)
  • Review loan servicing, monitoring, and tickler reports that identify all loan covenants, and ongoing monitoring items, such as insurance policies, pending loan and collateral documents, and loan officer exception reports—for more information, see Commercial Loan Administration and NCUA regulation part 723, Member Business Loans; Commercial Lending (Preamble)
    • Evaluate the adequacy of tickler systems for the types of commercial lending being conducted and confirm they are well maintained and up-to-date with all relevant information
  • Review any third-party or internal review reports obtained since the previous exam, including reviews of commercial loans, processes, policies, and staffing/organizational structure—for more information, see Commercial Loan Administration
    • Review the corresponding engagement letters to determine compliance with the contract
    • Ensure the party requesting a review was independent from the commercial loan department, such as the supervisory committee or an internal auditor
  • Explain any risk rating differences between the credit union and the third-party review; review management’s written responses to the third-party review and evaluate any corrective action plans
  • Review the commercial loans approved with policy exceptions reports, including exceptions to underwriting and risk tolerance standards—for more information, see Commercial Loan Administration

Problem Loan/Reserves

The following review areas may be conducted as part of the sample loan review, as applicable.

Last updated October 14, 2021