Bank directors know that while there are many risks that all banks face – including some serious emerging issues – the major, ever-present risk that causes the most bank failures is credit risk.

The question then becomes: how well do they know the key components of an effective credit risk management system that can protect the bank’s safety and soundness and minimize the liability of the directors? The loan review department is a key aspect of an effective risk management system – yet it may not be functioning effectively. While bank directors are justifiably concerned about future economic conditions and the potential impact on their loan portfolios, are their institutions’ loan review departments really effective “early warning systems” for credit risk?

Part of the loan review challenge today is the difficulty in finding and retaining credit risk professionals. Loan review analysts are not on a typical bank “career path;” finding people with the right skills who are interested in a loan review position is a growing challenge. Is a hybrid staffing model blended with outsourced loan review services a necessity to address staffing issues today?

Other relevant challenges for banks include a growing acceptance and desire for a remote work arrangement, which can minimize collaboration, peer exchange and interpersonal communications. Only now are affordable technology tools emerging to support the loan review function to assist remote workers. Are banks investing in automation of this area? How can directors determine if loan review is bringing in the value it should to you and your bank?

Bank-Specific Considerations
When assessing the value of a loan review department, including efficiency and effectiveness of their functions, a lot depends on the characteristics of the bank itself. Smaller banks may have no choice than to use an outsourced model or hybrid blend of resources due to a lack of available internal skilled resources. Much larger banks typically staff their department with internal resources, which can present different management and career path issues. A bank with a rapidly growing book of loans may face difficult decisions on their model.

The specific responsibilities of a loan review department differ depending on the institution’s history and credit culture. Some banks virtually re-underwrite their sampled loans during exams – including financial re-spreading and deep dive document compliance. Other banks focus on a current validation of the risk rating and potential risk of credit deterioration. In many banks, loan operations does quality control checking for loans booked and internal audit performs documentation reviews, while other banks consider such duties to be part of loan review. Obviously, each bank needs to assess and clarify its department’s structure and responsibilities scope, along with its staffing model.

Other areas that differentiate different loan review departments include sample penetration thresholds and goals. Some departments have goals to review 60% or more of all borrowers over a certain threshold of loan size, while other’s objectives have less volume and more “risk targeted” exams. A more forward-looking model in vogue today is using “continuous monitoring” to watch emerging risk patterns and trends.

When assessing the value of a loan review department, management and the board should thoroughly understand the current state and how these bank-specific characteristics factor into the model of their team. It’s appropriate to challenge the current model and question its business value. As part of their responsibilities to the bank, directors must perform their duty of care and “trust but verify” the effectiveness of their loan review department.

Banks today are looking at any and every opportunity to build efficiency and cut costs, even in important areas of risk control like loan review. Many institutions have not been considered the loan review department’s cost-effectiveness in years. While banking has seen rapid change in many operational areas, thanks to automation and process changes put in place during the pandemic, loan review has languished. Many departments today are doing running the same way they have been in the past. Rapid and meaningful assessment of the effectiveness and efficiency of the loan review department can bear significant fruit in two of the most important areas of banks today: risk management and operational efficiency. Now is a good time for the board to exercise its duty of care and assess the loan review department’s ability to deliver these benefits.


Peter Cherpack

EVP, Senior Director of Credit Technology, Partner

Peter Cherpack is executive vice president of credit technology at Ardmore Banking Advisors, Inc., focusing on credit data management and risk control. Mr. Cherpack has been with Ardmore since 2002. He specializes in credit data management best practices, CECL/ALLL calculations, stress testing and concentration reporting solutions for community banks and smaller financial institutions.

Mr. Cherpack is a nationally recognized thought leader in best practices for concentration management, stress testing and CECL’s impact on community financial institutions, and a business partner of Computer Services, Inc. (CSI) and Argus. As part of Ardmore Banking Advisors, he brings a unique mix of banking and technological knowledge, along with extensive experience in credit/risk business process and data analysis solutions.