It is not difficult to understand that the tremendous loss in collateral values across loan portfolios is due to very difficult economic conditions facing investors. And it is very true that most loans were originated utilizing appropriate credit underwriting standards at the time of the loan. However, examiners have made it clear that the burden of proof rests with the bank in these situations.
Unfortunately, as the focus of lenders remained on the hunt for new business, a majority of credit files received very little attention. These once performing credits are now in non-accrual or sub-standard status. As these files are examined by regulatory agencies, it is clear that there is a lack of management throughout the credit file, providing little credibility into economic reasoning, despite the likelihood this was the case.
As evidenced by the recent announcement of the FDIC Investor Match Program, the FDIC seems to understand the economic strain that has been placed on banks. However, it is evident that the overall view of regulatory agencies is that a significant number of credits could have been salvaged had the management of banks simply followed the credit policies set forth and properly managed the credit file.
Moving forward, it seems extremely likely that examiners will make certain banks understand the importance of proper credit file management. Banks should not only have financials and property data updated regularly, but also implement an appropriate CRM and database management application. Relationship Managers and Credit Analyst should all have the ability to access a web-based system that allows the bank to regularly update a file. Further, site visits should be included as ongoing credit management, not simply for loans that have now been classified as sub-standard.
For more information on the FDIC Investor Match Program please read the following press release from the FDIC: