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Chapter 5: Procedures

If any one forces you to go one mile, go with him two miles. Give to him who begs from you, and do not refuse him who would borrow from you.

-Matthew 6:41-42

One of the people who works in the loan department, who will remain nameless, once commented to me that Corus was a great place to work because there were no rules. An exaggeration of course, but the point is a good one. While it is less true for Credit Analysts than for higher ranking folk, even the lowly have a wide freedom to do their work how they want and when they want, and to a certain extent even to choose what they do and do not want to do.

That said, I want to point out that rules function not only to restrict employees but also to guide them and to protect them. An employee who has always followed the rules can be sure that, unless management is completely corrupt, he can never be made the scapegoat when things go wrong. At Corus when something goes wrong it is simultaneously everyone's and no one's fault. And even if you do everything right, some blame for the catastrophe in the project you were tangentially involved in might latch onto you. At Corus the motto is "It's your job!"

Approvals

Prestige at a bank is measured in approval authority levels. This holds true in the retail department as much as in the loan department. Approving overdrafts is essentially the same thing as approving a loan after all. For the most part lending authorities at Corus are pretty low. You can look up everyone's authority in the loan policy manual. Those levels are largely honorary however. Most of our new loans are at levels far higher than the approval authority of any individual officer. (Approval can also be granted by combining the authority of two, but not three or more, officers. However, most new loans are far higher than any two officers.)

Real authority is vested in the augustly named Directors' Loan Committee or DLC. The DLC has three members: Bob Glickman, Michael Stein and Terry Keenan. Approval is granted when two members vote to support a credit, so long as one of the two is Bob. The DLC has the authority to grant loans up to the bank's regulatory lending limit, which is currently about $28 million. The bank is involved in some transactions much larger than this limit through participations with other financial institutions however.

Loan approval is documented in several ways. First and foremost by a loan approval sheet. This is a standard form that the officer or officers or acting chairman and acting secretary of the DLC must sign. It should spell out the basics of the transaction: borrower, purpose, amount, term, rate. The original of this document must be given to the note cage (see below) in order to get them to book the loan and disburse funds from it. If approval was granted by the DLC then there must also be DLC minutes. These should give a bit more detail about the deal than the approval sheet and be executed by the acting chairman and secretary.

Note Cage/Booking

All of the original notes are kept in the note cage, which in the old days in the Wild West actually had bars around it. The note tellers, the denizens of the note cage, are responsible for maintaining the bank's records of each loan. They are also responsible for all loan disbursements and billings.

Once the loan has been approved and documented it has to be booked by the note cage. This is the procedure the note cage has for entering all the data about the loan into the computer. Of course there is a booking sheet that has to be completed for this job. But the note cage will not be satisfied with that alone. They will also want all of the following, and possibly more.

The note - If you don't actually have the note, and you almost never will since it will be being signed by the borrower on the day of the closing when you need the loan booked, you can supply them with an unexecuted copy, the "dummy note", with the original to follow when it gets to your grubby little hands. Once you have the original, pass it on to the note cage as soon as possible. If it does get lost, make sure it ain't your fault.

Loan fee worksheet - This is a funny little form that shows how the money the bank collected for its fee (the points) is to be used. The accounting department is very particular about this form, since how the fee is taken to income is dependent on how you fill it out. First you have to reduce the points by the amount of any direct expenses paid by the bank that are not reimbursed by the borrower. There should usually be none of these. Now comes the funny part. According to the rules of the generally accepted accounting principals (GAAP) the points a bank collects for a loan have to be amortized over the term of the loan. So, if the bank collects a $1,000 fee for making a ten-year, $100M loan the bank can report $100 in income each year of the loan. However, the bank is allowed to collect an additional amount at the time of origination based on the expense of originating the loan, which is basically the salaries of the employees who worked on it. This form contains the information the accounting department needs about how much of the fee to take to income and how much to amortize.

Wire form - Only if you intend to wire money obviously.

CRA/HMDA and Compliance worksheets - These are some utterly useless forms you have to fill out otherwise making the loan is illegal.

Title commitment - To get the county and tax identification number (called the PIN, Permanent Identification Number in Illinois) of the property. This is so the note cage can set up its tax payment or tax search procedures.

Proof of liability and hazard insurance - Strictly speaking this isn't a note cage function at all. But as with the CRA/HMDA and Compliance stuff they act as a policing force to make sure this is done.

Files

Each loan has at least two different files associated with it, and usually three: the credit or main file, the collateral file(s) and the subsidiary file(s). It is of course your job to build the files. In the descriptions that follow I am giving my opinion of how things should work. I think that I have reasons for wanting it my way, but others like to do it different ways, and I'm not 100% certain they should be condemned as pariahs for doing it their way. As long as I don't have to deal with their screwed up files.

First some basic rules. Files should be named as follows: principal borrower - project location. Example: Smith-Aurora. To be filed with the other Smith files under S. This should be true even if Smith is not the Capital-B-Borrower; if he set up the Goofy Name LLC for instance. Never name the file Goofy Name LLC and then alphabetize it under G. How will other people be able to find it? No one will remember the goofy name, not even the borrower himself. People will remember the name of the principal and the location of the project. This is the system Bob himself uses to track loans. Learn it, live it, love it.

Second big rule. Put the same name on every file. This seems so obvious, but it is broken all the time. I cannot imagine any excuse for this type of ridiculous behavior.

Third and final big rule. Put the loan number, as given to you by the note cage, on each and every file. Again, this rule is broken all the time. Again, there is no excuse for this.

You will save yourself and everyone else much time and frustration by following these simple rules. On to the actual files.

The credit file should contain the following things:

  1. A copy of the note.
  2. Credit notations or memorandums.
  3. Original or a copy of the loan presentation and each subsequent review.
  4. Original or a copy of each quarterly construction report, if applicable.
  5. Original or a copy of each P50, if applicable.
  6. Permanent (i.e. important) correspondence.

I think that that is about all it should contain, but I like my credit files to be sleek, lightweight and aerodynamic. Other people like to put much more into them. I feel this makes it difficult to find the stuff that is really essential. Some don't put a copy of the note into it. I like to have it since it is the one document that I am likely to consult frequently while servicing the loan.

Everything on the list has been covered except for the credit notations. These are short dated memos written to the file in their own separate section. You should be able to understand the basic history of the deal and its particulars by reading the memorandums alone. There is a wide variety of approaches to how detailed they should be. I tend to want them short and simple. I try to avoid stating obvious things like "see enclosed report for more detail." No kidding. You should write a memo every time you do significant work on the loan. If you review it: "On this date the loan was reviewed and no further action was taken." Nice. Also write a credit memo if you downgrade the loan. Or upgrade it. Or change the terms. Or extend the maturity. Etc.

The collateral file(s) contains all the work the lawyers did. The mortgage, the title policy, the guarantees (probably the most important documents, as they are irreplaceable), the authority documents, the construction loan agreement, and etc. All this should be packed up neatly, stuck in the vault, never to be consulted again.

The subsidiary file(s) contain everything else. Copies of appraisals, environmental reports (although a case can be made that that is a collateral document), tax returns, personal financial statements, whatever documents you accrued while underwriting, maps, photographs, the kitchen sink. Its probably a wise policy to never throw any of this stuff away until the loan pays off. The appraisal at least will be consulted again and again during annual reviews and such.

Reports

I know that in the introduction I said I would concentrate on the job of underwriting and not waste time talking about reports. Well, I lied. (But I will keep it quick.)

I've already covered the bad reports: the watch list, the P50 and the OREO. Other monthly reports include: the monthly loan activity report (also compiled weekly), margin review (loans secured by stock), maturing loans report, collateral code and geographic region report (summary of how the bank's loans are distributed geographically and across product type, i.e. hotel, industrial, office, etc.), miscellaneous payables report (accounting of all fees collected and bills paid relating to loans that have not yet closed or have outstanding issues), open letters of credit report (I'll explain what a letter of credit is later). All these and a few others are bound together into one package and presented to the Bank's board of directors.

Another monthly report is the loan review update. This one lists how many loan reviews behind each officer is. A little public moral suasion to enforce timely reviewing.

A list of all the past due loans is sent out at least once a week. You'll end up getting many more copies of this thing than you could possibly ever use. Scan it at least occasionally to make sure no loans that you work on have appeared on it.

There are several reports that are compiled every quarter that describe the bank's loans by property type, the "exposure" reports. They include the industrial exposure, hotel exposure, retail exposure, etc. These reports include a number of pertinent statistics about each of the bank's loans in that property type. LTV, rate, per square foot loan amount, etc. Reading them is a quick way to get an idea of what terms are available for a particular property type.

More quarterly reports include:

The construction project and leasing status report, which is actually a collection of all the individual status reports for each construction loan in the bank's portfolio.

And the grand-daddy of them all: the report on the Allowance for Loan and Lease Losses (the ALLL). This contains the bank's calculation of how much money it expects to lose and how many loans it expects to go bad. A great read.

Return to Chapter 4: Construction Lending - Continue to Chapter 6: Advanced