loan-policies-cdfi-fund-final.ppt

CDFI Loan
Policies and Procedures
Portfolio Management Series Webinar
Developed and delivered by

Today’s Session
 Introductions
 Benefits of a loan policy
 Twelve elements of a good loan policy
 Lending control functions
 Conclusions
There will be time for questions throughout
CDFI Fund Capacity Building Initiative Loan

Introductions
 Kristin Faust
– Director of Lending and
Network Services at Partners
for the Common Good
 You, the participants
– Small and large CDFIs
– Loan funds, credit unions,
and banks
– Consultants

Establishing a Loan Policy
Why do we have loan policies?
 Establishes authority, rules and framework to operate
and administer the loan portfolio effectively
 Controls lending risk
 Ensures the institution’s stability and soundness
 If reviewed regularly by the Board will ensure that
underwriting practices and loan documentation are in
accord with the Board’s tolerance for risk

Establishing a Loan Policy
Know Your Objective
 Why are you writing loan policies?
 Who is your audience?
1. Staff
2. Board
3. Outside reviewers
4. All of the above

Twelve Elements of a Good Loan Policy
1. Clear mission
2. Specify lending authority
3. Delineate responsibilities for reporting loan information
4. Describe origination, underwriting criteria and process
5. Documentation for complete application and complete
credit file
6. State who maintains credit files

7. Collateral guidelines
8. Loan rating and loss reserves
9. How interest rates and fees are set
10.Preferred upper limit for total loans outstanding/
concentrations
11.Describe trade area
12.How to detect, analyze, and work out problem loans

A clear mission statement for the CDFI’s loan portfolio

Example #1
•The Credit and Portfolio Management Policies Manual is
intended to help staff and board make loans that meet the
project-related credit needs of community development
organizations in our town while simultaneously meeting our
obligations to investors for safety, liquidity, and social and
financial returns.
•The following Credit and Portfolio Management Policies
are intended to help CDFI’s staff and Board make loan
decisions, and manage and monitor the Loan Fund’s risk
related to diversification of the CDFI’s borrowers, type of
project financed, and terms of credit extended while
simultaneously maintaining liquidity and income sufficient
to meet all of the CDFI’s obligations to investors.

Example #2
CDFI expects and accepts credit risks beyond the
tolerance of regulated lenders. Management of these risks
is the primary source of risk mitigation. All professional staff
are expected to be actively involved in managing credit
risks.
CDFI will rely on the best judgment of these professionals
in reviewing and making loan decisions. The following
criteria will be considered by the Loan Committee, Board of
Directors and staff when reviewing a transaction; staff is
expected to identify the risk of each transaction and identify
appropriate mitigation on a case-by-case basis.

Example #3
Guidelines are designed to provide Lenders with a
description of the types of loans extended, key underwriting
criteria, and general standards for portfolio management.
These guidelines should be referenced and used in
conjunction with the CDFI Loan Processing Handbook,
which more fully details operating procedures.

Considerations/Questions
 Board approved/board review
 Confidentiality
 Rigidity – guidelines or policies?
 General quality of loans
 Amount of detail of policies

Specification of the lending authority of each loan officer and
the loan committee including the maximum amount and
types of loan that each person and committee can approve
and what signatures are required

Example
 Large Loan Fund/Complex
 Other examples:
– All loans go to loan committee
– Staff approves up to small dollar
amount
Loan Amount Relationship
Exposure
Delegated
Approval
Authority
< $1,000,000 < $2,000,000 Chief Credit
Officer
> $1,000,000 < $2,000,000 CCO & CEO
> $2,000,000 >$2,000,000 Loan Committee

Considerations
 How many people does it take to approve a loan?
 Do you want one individual to have loan authority?
 What is approved by Loan Committee?
 What must go to the Board for approval?

Lines of responsibility for making assignments and reporting
information within the lending division

Example
 Loan applications will be taken by individual lenders or
assigned by the Chief Lending Officer.
 Entering a written summary of any visit with a prospect
into the X database is the responsibility of the lender.
 Each lender is responsible for recommending an
upgrade or downgrade of a loan in his/her portfolio at the
time that pertinent information is obtained.

 Does your CDFI have a shared database where lenders
and staff can read up on prospective borrowers?
Existing borrowers?
 Who is responsible for reviewing the loans on a regular
basis for risk rating changes?
 Do you have a watch list that is regularly presented to
the Loan Committee?

Operating procedures for soliciting, reviewing, evaluating, and
making decisions on customer loan applications

Example
 Underwriting criteria by loan type:
– Real Estate, Business, Single-Family Mortgage,
Construction Lending, Microfinance, etc.
 Underwriting criteria overarching
– Size and complexity of loan
– Purpose and source of repayment
– Borrower’s ability to repay on time
 Borrower eligibility criteria

 Do you specify different underwriting criteria for different
types of loans?
 Will you be scoring your loans numerically to derive the
risk rating?
 Is the scoring grid included in the policies?

The required documentation that accompanies each loan
application and what must be kept in the CDFI’s credit files

Example
Credit files shall be well organized, current and include the
following information:
 Correspondence with Borrower
 Borrower organizational documents
 Loan documents
 Insurance documents
 Disbursement records
 Risk rating records
 Borrower, guarantor and/or project financial information
 Project pro formas
 Project budgets
 Loan application
 Collateral information and other relevant documentation used
in making the credit decision or reviewed prior to loan closing

Considerations
 What filing system will you employ?
 Credit files, collateral files, monitoring files, desk files –
do you need them all?
 What goes in each?
 Collateral files need to be in fireproof container
 Hard copy files or electronic files?

Lines of authority within the CDFI detailing who is responsible
for maintaining and reviewing the credit files

Example
 The Lender shall be responsible for creating and maintaining
the credit file for each loan that is approved and closed.
 Annually, the Chief Credit Officer shall conduct a review of the
credit files to ensure completeness

 How to increase compliance with this requirement?
– “Clean-Up Day”

Guidelines for taking, evaluating, and perfecting loan
collateral

Example
 Loan Security
– General policy of loan security: “An unconditional
repayment guarantee shall be required for all loans.
In addition to a guarantee, the CDFI’s policy shall be
to require security for all loans.”

Example
 Collateral valuation standards
– In the case of real property, the Fund will require an appraisal
document. Although the Fund recognizes that a fully documented,
current, MAI appraisal is beyond the financial capacity of most of
the Fund’s borrowers, an appraisal document acceptable to the
Fund shall be required. An appraisal document includes one of the
following:
1. A letter of appraisal updating a previously completed fully
documented appraisal
2. A letter of opinion of value prepared by a licensed real estate
broker provided the value is substantiated with comparable
sales and other documentation vs.
3. A form appraisal prepared by a licensed real estate appraiser.

Example
 LTV not to exceed x% without Board Approval
 For loans up to and including $100,000, a staff prepared
collateral valuation based on current market data will be
acceptable subject to approval from the appropriate
levels of loan authorizations.
 Unsecured loans
– Unsecured loans should be considered when a strong
and creditworthy borrower makes such a request

Considerations
 Do you have consistency in applying collateral/security
standards?
 Where can you as CDFI show flexibility?
 What is an exception?
 Who can approve an exception?

Establish a risk rating system and loan loss reserves

A Risk Rating System
 A risk rating system allows the CDFI to classify its loan
portfolio by different levels of risk
 Risk is determined by criteria associated with the loan
such as payment history, previous history of borrowing
with the fund, LTV, cash flow and external factors among
others.
 CDFI may start with a system that mirrors another CDFI
but it should be refined and revised as time goes on and
the CDFI gains more experience with its particular type
of lending and market.
 Most CDFIs will link risk ratings to established Loan Loss
Reserve amounts

Example
1. Moderate Risk - Two or more of the following characteristics: loan
has sufficient collateral and cash flow and presents no new risks;
collateral, cash flow, and credit exceed requirements; (LTV 70 –
90%)
2. Average Risk – Collateral, cash flow and credit cover loan (LTV
90%)
3. Substantial Risk – Tight collateral coverage or cash flow of debt
service is tight (less than 1.05)
4. High Risk – Payments 30 days past due, weak financial condition,
uncooperative borrowers, non-existent financial reports, external
events with serious negative impacts, possible workout
5. Work-Out – Payments 60 days past due, value of collateral or
guarantee is less than loan

Linking Risk Rating to Reserves
Risk Rating Reserve
1 3%
2 5%
3 10%
4 20%
5 50% or more – determined per loan

 How often do you review risk ratings?
 Whose responsibility is it?
 Is the risk rating linked to the loan reserve?
 If not, how often is the reserve calculated?

Guidelines for rates and terms on loans

Examples
 Interest rates will be established and reviewed at each
Loan Committee meeting by the Loan Committee
members. The CFO shall be responsible for submitting
sufficient information before each meeting including but
not limited to 1) Other lender rates, 2) Cost of funds, 3)
Budgeted interest rate spread.
 The CEO shall establish interest rates and fees.

Considerations
 Document how rates and fees are set and other pricing
considerations are set.
 Is there a regular review of fees, rates and terms?

A statement of the preferred upper limit for total loans
outstanding, portfolio mix and concentrations

Example
In order to reduce risks in its portfolio resulting from various
potential concentrations of loan volume, CDFI establishes
the following limits as a percentage of lending capital:
15% to any one borrower
25% to one type of business
33% in loans secured by vacant land
35% in unsecured loans
25% in one geographic area

 How do you define lending capital?
– Borrowed capital
– Borrowed capital + equity capital
– Loans outstanding
 Consider clause such as: CDFI may reconsider these
limits from time to time due to product performance, or
growth in capital available for lending, or other pertinent
factors.

12 Elements of a Good Loan Policy
A description of the CDFI’s principal trade area from which
most loans should come.

Examples
 For all loans, the borrower must live or be interested in
purchasing in X, Y or Z counties in Our State.
 Loan requests are generated on a national basis through
local offices and affiliates.

Considerations
 How will you allow exceptions?
 Will you follow an existing customer outside your
geographic area?
 How will you track and report exceptions?

A discussion of the preferred procedures for detecting,
analyzing and working out problem loan situations

Example
If by the 90th day no payment has been received, the Loan
Committee will examine the situation, based upon a detailed
account of the borrower’s operational information and a review
of the collateral. The Loan Committee will develop a strategy for
further action, including:
Loan restructuring
Strategy to liquidate the collateral
Notice of default and the intention to foreclose
A further forbearance of action based upon certainty of
repayment and confidence of operations
Sending the loan to a collection agency (not common)

Considerations
 Be specific
 Who is responsible for collections?
 Do you have a clear definition for extensions for Restructured
Loans?
 When do you start foreclosure?
 When do you charge off delinquent loans?
 Have you built in the flexibility you might need?
 Who has authority to make the decision about next steps?
 What reports does the Board see regularly to help them stay
current with problem loans?

Lending Control Functions
1. Audit Functions
2. Loan Review
3. Portfolio Review

Audit Functions
• Does your auditor review credit files?
• What do they look for?
• Do you ask them for their results?

Loan Review
• Assesses individual loans including repayment risks
• Determines compliance with loan policies
• Identifies lapses in documentation
• Evaluates the risk rating

Portfolio Review
• Aggregates data on portfolio
• Measures against defined portfolio limits
• Helps identify risk at a more macro level

Considerations
 Determine frequency
 Determine who does the work
 Consider impact on staff/workflow

Sample Loan Policy Table of Contents
1. Introduction
2. Mission Statement
3. Scope of Services
4. Loan Limits
5. Interest Rates and Fees
6. Loan Approval Authority
7. Loan Origination Standards
8. Modifications and Extensions
9. Credit and Security Standards
10. Risk Rating Classifications
11. Underwriting Standards

Sample Loan Policy Table of Contents
12. Underwriting Standards for For-Profit Borrowers
13. Construction Loan Underwriting and Management
14. Borrower Financial Reporting
15. Real Estate Appraisals
16. Environmental and Hazardous Substance Risks
Attachments:
 Risk rating by product type
 Guidelines for completing the credit request memo
 Sample appraisal engagement letter
 Personal financial statement forms
 Special loan program requirements and loan terms

Sample 2 –Table of Contents
I. Mission
II. Introduction
III. General Provisions
IV. Loan Committee: “Special Program 1”
V. Loan Committee: “Special Program 2”
VI. Standard Lending – purpose, eligibility, terms security,
closing costs, environmental risk, escrows,
commitment process, denial of applications,
VII. Lending Criteria and Procedures
VIII. Loan Servicing & Collections
IX. Exception of Lending Policy

Concluding Thoughts
 Even revisions can take a long time
 Give up on perfection – aim for prudent, clear and
representative of what you are doing (as long as what
you are doing is sound lending!)
 Consider your own organization’s dynamics
 Loan policies work together – like underwriting
 Policies are only as good as your practices

Wrap-Up
This presentation is the first in a series of four webinars to
be held over the next few months. The others are:
Raising Debt & Equity from External Sources
Risk-Assessing Your Own Organization
Managing Troubled Assets
Register at:
http://www.carseyinstitute.unh.edu/CDFI-webinars.html
For more information about the CDFI Capacity Building
Initiative, visit:
http://www.cdfifund.gov/

Wrap-Up
Sample documents, etc. will be available as part of a
Resource Bank on the CDFI Fund’s Capacity Building
Initiative webpage later this summer. Please see
http://www.cdfifund.gov/cbi to view the Resource Bank and
other helpful information on the Capacity Building Initiative.
As part of the Capacity Building Initiative, free TA is
available for CDFIs. To sign up, email:
jack@nemarketresearch.com or
ehangen@i2community.org
If you have not taken the survey, please do so at the
following link:
http://www.unh.edu/survey-center/cdfi.html

CDFI Loan Policies and Procedures
Questions? You can email me at faustk@pcgloanfund.org
Thanks for being with us today!

loan-policies-cdfi-fund-final.ppt

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