Knowledge and Insights

Banks and financial institutions rely on the insight from independent loan reviewers to uncover potential risks embedded in their loan portfolios. As part of standard practice, financial institutions engage independent entities to review their loan portfolios, ensuring no undue risk may affect the Bank’s overall asset quality and capital composition.

An independent review of the commercial loan portfolio examines the Bank’s underwriting activities, closing documentation, and attesting the Borrower’s ongoing repayment ability. These ensure that the Bank’s loan portfolio stays on course with the direction set forth by senior management and complies with regulatory requirements. An Independent Loan Review is an excellent quality control instrument to monitor new lending activities and loan administration practices. Additionally, the Independent Loan Review supports the credit risk function on:

• Ensuring that the underwriting and portfolio management practices satisfy regulatory requirements as well as industry best practices
• Providing management with an objective assessment of credit, documentation quality, and ongoing portfolio management
• Serving as a critical component on credit risk management function
• Providing the Bank with information about ongoing and emerging portfolio trends

However, the review of Commercial and Industrial (C&I) loans differs from Commercial Real Estate (CRE) loans. One of the most attractive elements of CRE lending is that the dollar amounts involved are typically large, which helps the Bank cover the cost of acquisition than C&I. CRE carries additional regulatory requirements regarding the credit administration function, ongoing repayment ability determination, and capital allocation.

Banks engage third-party independent loan reviewers to validate that the CRE loan portfolio stays on course with the senior management direction following regulatory requirements. It would be the duty of an independent loan review to verify the Borrower’s loan risk rating, compliance with contractual conditions, and validate the banks’ account management practices. The independent loan reviewers tasks include:

• Examining the Borrower’s contractual compliance and ongoing repayment ability
• Reviewing the accuracy of the risk ratings following specific CRE guidelines
• Identifying potential problem loans and policy exceptions
• Evaluating the loan portfolio quality  and effectiveness of the credit administration function
• Ensuring compliance with regulatory requirements, particularly related to capital allocation
• Benchmarking the institution’s portfolio to similar institutions’ portfolios
• Assessing the loan portfolio performance

The experts at Mercadien have reviewed more than 5,000 commercial loans. As leading service providers in Independent Loan Reviews, we proudly support banks and financial institutions nationwide. To learn more about our Credit Risk Management and Loan Review services, contact us here or call 609-689-9700.

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.