A sound loan policy, established and overseen by the Board of Directors, positions management to control lending risks, ensure stability and soundness, and fulfill oversight responsibilities. An effective and up-to-date loan policy increases the likelihood that actual loan documentation and underwriting practices will satisfy the Board’s expectations. Furthermore, a well-conceived policy clearly and comprehensively describes management’s system of controls and helps auditors and examiners identify high-risk areas.
Written loan policies vary considerably in content, length, and specificity, as well as in style and quality. No two financial institutions share the same tolerance for risk, offer the same loan products, or face the same economic conditions. An effective loan policy should reflect the size and complexity of a financial institution and its lending operations and should be tailored to its particular needs and characteristics. Revisions should occur as circumstances change, and the policy should be flexible enough to accommodate new lending activity without a major renovation.
There are certain broad areas of consideration and concern that should be addressed in the lending policies of all institutions regardless of size or location. At a minimum, these include:
- General areas of lending
- Lending authority of loan officers or committee
- Guidelines for the loan portfolio mix, risk diversification, appraisals, unsecured loans, and rates of interest
- Limitations on loan-to-value and aggregate loans
- Credit and collateral documentation standards
- Collection procedures
- Internal controls to ensure compliance with the policy