Inconsistency at a bank or credit union can wreak havoc in a number of ways, but the two biggest challenges it creates are defensibility and accuracy. When it comes to growing and managing the portfolio, loan processes have to check both boxes. At each stage of the life-of-loan there are impediments to a consistent process:
Lenders and staff in charge of growing the portfolio likely have their own sales strategies and track progress on prospective loans and relationships in different spreadsheets. Unfortunately inconsistent reporting from lenders renders pipeline forecasting unmanageable. Furthermore, if individual lenders pre-screen borrowers in different ways, it can be challenging to document fair lending practices.
Once a prospective loan has been pre-approved or passes to underwriting, the opportunities for inconsistency abound. If individual lenders or analysts use their own techniques and templates for financial spreads and write-ups, methodologies and credit files could vary between borrowers and cause unreliable calculations, credit decisions and reporting.
Subjectivity can creep into risk ratings if a standardized template is not applied. This ultimately affects which loans are downgraded, monitored closely, labeled as impaired and then reserved for individually.
Loans require significant documentation and the receipt of updated information from borrowers according to underwriting requirements. If there is no central tracking system in place, these documents could be received irregularly, preventing scheduled loan reviews.
STRESS TESTING & PORTFOLIO RISK MANAGEMENT
Unclear regulatory guidelines for stress testing can lead to inconsistencies in gathering data for concentration and portfolio testing and reporting. Without a defined, bank-wide policy for stress testing, these processes can prove time-consuming and inaccurate. Similarly, risk management requires high-quality archived data to identify and monitor portfolio trends over time, so information has to be labeled and aggregated with consistency over time in order to be meaningful.
Examiners look for consistency in the allowance calculation and evaluate loss measure methodologies, time horizons, cash flow calculations, qualitative factors and other assumptions to ensure they are applied uniformly to the ALLL over time.
Inconsistency can stem from people changing roles, new hires, lack of discipline or even growth within the institution, so it is critical to have a system in place to keep processes intact. Software solutions can often improve standardization for bank-wide processes and can make processes more transferable in the event of personnel or policy change.