Documentation Exceptions
“Loan documentation” refers broadly to the documents needed to legally enforce the loan agreement and properly analyze the borrower’s financial capacity. When a document is missing, stale, or improperly executed, it becomes an exception. Common loan documents are promissory notes, note guarantees, financial statements, collateral agreements, and appraisals. The promissory note, guarantee, and financial statement must be properly prepared and signed; the financial statement must be received and analyzed in a timely manner by the bank; and the collateral agreement must be recorded in the appropriate jurisdiction.
Documentation exceptions can exacerbate problem loans and seriously hamper work-out efforts. For example, failure to ensure that financial information is received and reviewed in a timely manner can preclude the early identification of potential problems and the opportunity to give those problems immediate attention. Failure to promptly review financial information can delay the identification of covenant violations, which may jeopardize the enforceability of the loan agreement. Neglecting to renew a UCC filing can turn a secured credit into an unsecured credit.
In most banks, loan administration is the control point for loan documentation. A bank should systematically identify document exceptions, initiate timely resolution, and ensure that documentation remains current and valid throughout the loan term. Pre-closing reviews by the lender or attorney and post-closing reviews by loan administration will surface most deficiencies. Needless to say, document exceptions are much easier to rectify before a loan is funded. Banks should analyze document exception patterns to identify problems in the origination process as well as to identify officers, units, or geographic locations that need to strengthen their compliance with policies on documentation. The effectiveness of this control function should be reviewed by audit and loan review.
More information is available at https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/loan-portfolio-management/pub-ch-loan-portfolio-mgmt.pdf
BankStride is a digital banking solutions for loan covenants monitoring, portfolio management, loan reporting, exceptions, financial reporting, loan risk by automating document collection software streamlines your document requests and collection workflow for documents gathering, reminders, team collaboration, file access control and alerts.
