What Is a Loan Committee?
Let me explain what a loan committee is. It's the lending or management committee in a bank or other lending institution, made up of upper-level officers who hold management authority. This committee steps in to analyze and then approve or reject any loan that the initial loan officer lacks the authority to handle, especially those that are large in size or carry higher risk. They make sure the loan aligns with the institution’s standard lending policy. If it does, they can commit to funding and disbursing the loan.
Key Takeaways
- A loan committee includes upper management of a lending institution with authority to approve loans beyond the initial loan officer's scope.
- They review loans that are generally large or risky.
- Their role ensures the loan meets regulatory standards, the firm's lending policies, and fits the credit risk appetite.
- They assess factors like risk mitigants, borrower's credit score, past payment history, outstanding debts, and current liquidity.
- The three main U.S. credit reporting agencies provide key credit information to aid decisions.
- The committee also decides actions on delinquent loans.
Understanding a Loan Committee
You should know that a loan committee handles regular credit reviews of the bank’s maturing loans—those nearing the end of their terms and up for renewal. For instance, if you have a 10-year loan in its ninth year, it's maturing, and if you're interested in extending it, the committee reviews it. Sometimes, the bank might extend the original credit facility, but the committee ensures this follows proper procedures. It's crucial for the bank to confirm that your creditworthiness hasn't declined.
Beyond maturing loans, the committee reviews new loans that are large, complex, or high-risk. These go beyond the initial loan officer's authority and need approval from upper management, like the chief risk officer (CRO) and chief financial officer (CFO).
Determining Loan Quality
When determining a borrower's creditworthiness, the loan committee conducts a thorough valuation. They look at your past repayment history and credit score, the value of your assets and liabilities on your balance sheet, the loan's purpose, risks in your industry, forecasting models, and other details that highlight potential risks. Based on this, they approve or reject the loan. They might also approve it but with different terms than you requested to reduce risks.
In the U.S., the three credit reporting agencies—Experian, TransUnion, and Equifax—report, update, and store your credit histories. The committee uses this in their decisions to extend credit. These agencies base credit scores on five main factors: payment history, total amount owed, length of credit history, types of credit, and new credit.
Collecting on a Loan
The loan committee also decides what collection actions to take on past-due loans. Depending on the institution's policy, if you miss a due date, they might charge a late fee right away or give you a grace period.
To get your account back in good standing, you need to make the required minimum monthly payments, including any late fees. If you're 30 days behind, that delinquency usually shows up on your credit report.
Finally, the committee ensures the bank complies with all regulations. This covers not just lending procedures but also issues like bankruptcy, receivership, and even reviewing marketing materials for potential customers.
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