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Task 2 Report – Loan Origination Process

Underwriting

 

Task #2:	Clearly define how to manage the process, including measuring results against expectations and routine and ongoing evaluation of policies and procedures.
Task Force Members:	PB, JD, PH, DW

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Executive Summary

The underwriting process is defined more by default due to the level of non-process requirements in the task of rendering a credit decision. Nevertheless, we believe there is room for improvement to help strengthen the overall process of closing loans.

Current weaknesses in the process are:

1.      The lack of common goals among all team members. Understanding that once a loan is approved, it should be every member’s goal to get that loan closed and on the books of XYZ.

2.      Presenting clear, concise documentation for other parties to rely on for their job function.

3.      General understanding of how the other components in the loan process are intertwined and dependent upon each other.

 

 

I.                   Objective

Credit underwriters should pursue two objectives:

1.      Credit Underwriting has the primary task of analyzing potential borrowers to see if they warrant an extension of credit by XYZ.

2.      Second, the underwriting function should see that these extensions of credit are documented and closed in an expedient and prudent fashion and meet the standards set out by XYZ and the SBA.

 

II.                Measurements

The credit underwriter is responsible to make independent credit decisions irrespective of the sales goals of the organization. Of course, consistent with the second objective listed above, they may prompt the transactions to close in a timely fashion after credit approval has been garnered.

The measurements of credit underwriting should involve the following dimensions:

1.      Qualitative—assessment of the quality and completeness of credit analyses. This measure would include:

1.      Post Approval Reviews—provides management with an assessment of the quality of the credit write-up soon after the actual approval.

2.      Risk Rating Accuracy—provides management with a clearer understanding loan portfolio risk and the quality of deals being underwritten. This is associated with the Post Approval Review.

3.      Delinquency Trends—provides an analysis of the quality of deals placed on XYZ’s balance sheet.

4.      Charge Offs—provides a post-mortem on previously approved and closed loans.

2.      Quantitative—the number of deals approved per quarter.

1.      Underwriters have the responsibility to turn around pending credit decisions within a short time frame. The quick turnaround increases customer service and leads to more closed transactions.

2.      We need to set goals that are attainable and clearly defined.

1.      Based on prior knowledge, we would expect an underwriter to complete 8–10 credit decisions per month. Historical numbers for the first 5 months of 1999 indicate numbers far below this range. However, because we cannot currently determine how many loans were considered but subsequently declined or withdrawn prior to decision, we believe these numbers are conservative.

2.      Also, based on the size of the transaction and the level of analysis required for smaller transactions, typical turnaround times should increase when reviewing small (<$250,000) loans.

3.      Clearly Communicated Credit Decisions—the clarity of credit write-ups.

1.      Based on feedback from team members, we should assess the degree to which the credit write-ups help meet the closed loan goals of the overall team by being completeness and clear.

2.      Underwriters should clearly communicate the approval or decline so the recipient of the information can easily follow the recommendation.

1.      LSA need to be clearly written.

2.      Loan conditions should be attainable by borrower.

3.      Teamwork Building—the efficiency of the local loan production team.

1.      The underwriter should utilize the team concept to move deals through the process. A deal is not completed until it is completely funded.

2.      Responsibility resides within the whole team in achieving the goal.

 

III.             Assessment

1.      Assessment of the performance of the individual underwriters and the teams as a whole need to be conducted formally each quarter.

2.      Periodic coaching sessions with individual personnel and small groups should be on-going.

3.      Before assessing the success of any changes to the underwriting process, we should wait to see the effect of assigning the underwriter additional duties such as construction loan analysis prior to closing.