Director's Role In Lending
by Dennis F. Ceklovsky
As published in Western Independent Banking
you remember the reasons outside board members were chosen
for your bank? Are you one? If so, were you recruited for
your lending underwriting acumen? The most common answer is,
"no." So how can you effectively render correct
decisions on your bank's most sophisticated loans?
are they here?
you recall the reasons for outside director recruitment, the
most important is the individual value they bring to the bank
- something the regulators insist upon when approving de novo
applications now. Their individual credit analysis and underwriting
skills were probably not a major factor, so should they be
expected to become credit "gurus" when they serve
on the loan committee? The answer is obviously no. What, then,
should their role be in the credit approval process of your
reality is, despite being responsible for the safety and soundness
of the bank, outside directors will NEVER be able to match
the skill level of the professional lenders at your bank.
Sounds like an oxymoron, doesn't it?
should be expected?
let's review the board's primary lending responsibilities:
and soundness of the bank's lending function
loan policies and procedures
you're a director, remember that YOU, not THEY, are responsible
for the safety and soundness of the bank.
for loan committee's outside directors
your existing business talents. This can range from specific
industry expertise to common sense. Generally speaking, directors
are most valuable in seeing the big picture - having outside
viewpoints regarding specific industry(s) and/or serving area
economic conditions, as well as knowledge of individuals and
issues should NOT be a part of the loan committee's responsibilities,
period. The loan committee is charged with a credit risk function.
Other board committees deal with profitability issues.
(keep it simple syndrome) or get back to basics. Too often,
we lose sight of this, particularly in larger, most complex
commercial loan transactions. In this regard, it is highly
recommended that directors remember the five C's of creidt
(the five key elements a borrower must possess to obtain credit).
(integrity) - will they pay?
to repay - can they pay?
- assests pledged
- borrower's investment
(loan and industry or economic)
you are unable to ascertain answers to the above questions,
ask the handling/presenting officer. Most importantly, if
you do not feel completely comfortable in making a decision,
DON'T. Yours is a weighty responsibility and not one of
a follower, but one of a leader.
engaged with your lenders. Your job doesn't end after approval
of the loans, it's just the beginning. Saying yes is the easy
part, collecting loans is always the challenge. Effective
loan committees follow-up on previously approved loans to
ensure they are performing as agreed. Regular management reporting
is the most effective way to accomplish this. It also provides
an ongoing scorecard of each lender's individual performance
and how they rank among themselves. Reporting items typically
include levels of criticized assets, past dues and loan losses
ranked by lender.
regularly with outside loan review consultants. These are
the folks that see things the loan committee usually doesn't
and they have no interest in the bank one way or the other.
Review their recommendations, and more importantly, your bank's
responses to them. Once again, if you do not understand something,
this is your opportunity to ask.
minimum requirement for a sitting member of any bank loan
committee should include a working knowledge or understanding
of credit underwriting at the institution. Should directors
need to know how to make loans? No. There's a huge difference
between making loans and approving them. Management hires
professional loan officers to make loans; it's the director's
job to satisfy him - or herself that they are made safely
and soundly, conforming to regulatory standards and bank policy.
directors with little or no lending experience or knowledge
should be trained for their laon committee responsibilities.
Attendance at national or accredited lending schools is great
but not required to accomplish this, as other alternatives
are readily available and discussed later.
a minimum, directors need to be fully knowledgable with the
bank's loan approval report format, as well as basic underwriting
requirements. All reports shoud be systematized under a uniform
format that is understood by all those involved in the lending
function. New committee members should be instructed in the
report format by management prior to their first meeting assignments.
underwriting requirements should include the following:
to assess the borrower's character
of primary and secondary repayment sources
valuation and acceptability of collateral
to assess the borrower's investment
structure and conditions
above requirements mirror the five C's of credit discussed
bank is in business to make a profit, no different than any
other company. The bank's core business is to accept deposits
and rent them out for a profit. Therefore, managing risk is
crucial to its success.
are charged with the ultimate responsibility for successfully
managing risk. However, outside directors are usually unfamiliar
with the bank's lending function, beyond the generic sense.
As mentioned earlier, this significant and most important
requirement to oversee and monitor the lending operation can
be successfully managed with proper training.
lending schools, professional consultants and outside loan
review providers are a good source for directorate lending
training. Professional consultants typically have substantial
credit training and real-life experience. In addition, they
usually interact regularly with other banks, as well as state
and federal regulatory agencies. Accordingly, their industry
horizon is wider than most community bank loan committees,
which can be a significant advantage for the bank. Lastly,
consultants can tailor their training content specifically
to the bank's needs.
source is chosen, an investment in director training is money
well spent, considering the possible consequences that are
thrown in the lap of these individuals when problems arise
in the loan portfolio.
in Western Banking Magazine