Loan underwriting guidelines, and the written documentation setting forth these standards, as determined by a bank's senior loan committee. A bank's loan policy also establishes minimum credit standards in booking new loans, policies and procedures in treatment of past-due and delinquent loans, and more generally, the type of customer a bank wants as a borrower.
In writing loan policy for a startup, a banker learned that you can borrow another bank policy, but that doesn't mean the FDIC won't scrutinize the policy.
Developing bank loan policy became Arnie Gunderson's task when he and two other bankers founded the Shoreline Bank in suburban Seattle in October 1999. In banking since 1986, Gunderson had worked for large and small banks, but had never written loan policy for an institution. How did Gunderson, the vice president and chief lending officer of Shoreline Bank, begin?
"It's common for community banks to borrow policies from other banks," says Gunderson. "So I began by taking the loan policy used by a nearby community bank and I adapted it for Shoreline." The other bank, Gunderson's previous employer, gave him permission to use its loan policy.
Gunderson reviewed its written loan policy line by line, making changes where necessary for Shoreline's customer base, which is comprised largely of local businesses. Shoreline had been founded by a group of local business people who "were frustrated with the lack of service by their big banks," said Gunderson. Although he wrote the loan policy before the bank opened its doors for business, Gunderson had to iron out some difficulties once the bank began processing loan applications.
"Although I went through the policy line by line, I did not actually write it line by line so it was not ingrained in my memory. Often when a question arose, I had to look it up. We wear many hats at our small bank and we don't have the luxury of time to study all the fine details of the policy," explains Gunderson. Shoreline has three bank officers and five support staff.. "We need to make a decision quickly," he adds.
When the FDIC examined Shoreline, Gunderson met some challenges and learned more about writing loan policy. "Overall, the exam went well," says Gunderson. "They were very thorough in their review.
"What I learned is that the FDIC has very specific guidelines about what they expect to see in bank loan policy." He notes that those expectations are clearly defined in the FDIC regulations, Parts 364-365, which are available in booklet form and online on the FDIC's Web site,
www.fdic.gov. Gunderson wishes he had used those guidelines as a resource when he developed Shoreline's loan policy.
Shoreline's adaptation of the other bank's loan policy was not enough to satisfy the regulators even though the FDIC had reviewed that bank's policy numerous times over the years. "Just because you use another bank's policy, which has passed exams, doesn't mean the FDIC won't have any suggestions for improvement to your bank's policy," explains Gunderson. "It appears the FDIC wants to be very certain that things get going on the right foot with a startup bank."
Another reason Gunderson believes the FDIC may have scrutinized Shoreline's loan policy more closely is that the focus of the agency's examinations may have changed now that the Y2K issue is past. "Now the hot button is credit quality, which is based on a lot of issues in the loan policy," says Gunderson.
He advises other startup banks that are preparing for an examination to determine what their regulators expect to see in loan policy and to make sure their loan policy addresses them. "The RMA Journal is a good source to find out what the trends are with the regulators, says Gunderson. "So is talking to another bank that has recently gone through an examination. You don't write specifically to please the regulators, but you do want to be sure your policy meets their basic guidelines before they come in.
At the request of the FDIC examiners, Gunderson primarily made additions and some corrections to the bank's loan policy. The regulators wanted to see maximum loan-to-value ratios for consumer loans and commercial real estate loans. They also wanted to see unsecured credit underwriting guidelines and minimum underwriting standards.
Loan Policy Contains Four Parts
In a 1987 Journal of Commercial Lending article, "A Guide to Creating a Written Loan Policy," authors Garry D. Bruton and Carol A. Kinzer say that a written loan policy is the cornerstone of a bank's operations, and it must be actively supported by the bank's management for the bank to succeed. They say the loan policy has four key parts:
1. Mission and objectives.
2. Lending guidelines.
3. Lending authorities and responsibilities of the bank's officers.
4. Established operating procedures.
"The mission statement should identify the fundamental means or strategies by which a lending institution will meet that mission," say the authors. "The strategies, which an individual bank employs in the pursuit of the objectives, are shaped by the following:
* The bank's strengths and weaknesses, such as the expertise of the bank personnel.
* The economic environment, such as the nature of the available financial resources.
* The potential for growth within the bank's designated market area.
* The personal values of the institution's key management, such as conservatism or aggressiveness. Gunderson says Shoreline's mission statement is not written out, but is imbedded in different sections of the policy. Clearly defined are the percentages of the portfolio devoted to commercial, consumer, or real estate. "Those figures always add up to more than 100%," explains Gunderson. "We don't want to have more than 10% agriculture, but right now we have 0% agriculture. We also define what we consider to be acceptable and desirable credits."
