Credit risk management requires bank loan officers to continually monitor a loan portfolio for any adverse changes that can lead to increased risk, which can cause a default if not handled properly. Many community banks assign pieces of the commercial loan portfolio to each loan officer for portfolio administration, which is in addition to their existing responsibility of generating new business. Loan officers can potentially be assigned to hundreds of loans and relationships, and interact with many borrowers and guarantors, both existing and new. It can become difficult for each loan officer to keep track of every loan situation surrounding the bank. This is where memos to file become important, as each memo documents periodic updates within the file, especially if the borrower is having difficulty paying the loan.
Memos contain necessary information that can be used by anyone servicing the loan. It can especially come in handy if the assigned loan officer leaves the bank or is re-assigned to another department. In this case, the new assigned person can review the memos, understand the chronological events that had occurred, and learn valuable information about the borrower that will help in communications going forward. It is always much more efficient to document important information in the credit file than retain it from memory or email, and can prevent a new or existing individual from obtaining insufficient information. Memos to file can also help after a loan defaults and a legal file needs to be prepared. These memos can summarize the events leading to the default as well as the bank’s efforts in being proactive to try and save the loan from this status.
An additional benefit of having current memos to file is the blessings received from auditors, examiners, and reviewers. For any examiner, first impressions are very important. If an examiner opens a loan file and sees a memo with a current date and information, they are more likely to have a positive impression of the bank’s portfolio management process.
During our discussions with loan officers when we perform loan reviews, we often find that they tend to know more information than what can be found within the loan file. When we determine gaps in the information available within the loan file, which is often received after inquiring with the loan officer, we often recommend banks to document updated information in the loan files for an efficient file management and monitoring process. Banks may choose to take an additional step and maintain a communication log that is available in the beginning of each file. Therefore, the memos to file would contain important credit-related information, while the communication log documents the discussion between the bank and borrower. This adds an additional layer of documentation for keeping loan files current. For example, the log can contain information such as the borrower sending updated financial information the following week, and the memo can describe the reasons behind the borrower’s difficulty in payment and the request from the bank for assistance.
Yes, there may be some additional work involved to type, print, and file these memos, but it is definitely worth the effort. This practice will not only save the loan officer’s time when an examiner or reviewer is on-site, but it will save time internally when a senior officer or President/CEO reviews any loan file and is quickly able find the answers to their questions within the memos and logs.
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