With the information presented, how would you vote on the Harvard Westerman loan? After you’ve decided, review the video clip and see how the rest of the board voted.
Did you hear any of the same concerns that you may have had with the loan? For example, Madison wants more information before deciding on the loan and she resisted pressure to make a hasty decision. Mike and Sean were asking not only that the board approve a loan that is nearly twice the amount of Insights’ in-house lending limit, but also that the board would agree to waive all financial information requirements for at least 30 days.
In Madison’s opinion, the stakes were too high with more than 20 percent of the bank’s capital at risk. Before she is willing to make such an exception, Madison wanted the company’s current financial information and an appraisal of the land.
Regardless of how thorough a bank is in developing its loan policy, the bank may be presented with profitable loan opportunities that fall outside the bounds set by the loan policy.
The primary tool banks use to control the risk stemming from their lending activities is the loan policy. This section focuses on a bank’s loan policy and the role it plays as the primary credit risk management tool.
A loan policy is a written statement by the board of directors that refers to the bank’s business and lending philosophy. It is the cornerstone for sound lending and loan administration. The loan policy establishes basic standards to help management:
Maintain sound credit underwriting standards.
Control and manage risk.
Evaluate new business opportunities.
Identify, administer and collect problem loans.
Lesson Objectives
After you complete this lesson, you should be able to:
State the role played by a bank’s loan policy.
List the basic elements of a loan policy.
Explain why policy exceptions should be treated with care.
