4/22/2024 0 Comments Implications of credit memoNew Beneficial Ownership Reporting Rules for Small Business.Loan Modifications Quick Reference Guide.IRS Issues Standard Mileage Rates for 2024.2024 Cost of Living Adjustments Resource.Fundamentals of Business Valuation: The Asset Approach.Optimizing Tax Benefits in Multi-Family Properties with Cost Segregation.Fundamentals of Business Valuation: The Market Approach. Fundamentals of Business Valuation: The Income Approach.Key Discount Factors for 2023 Unpaid Losses in Insurance Companies.Demystifying Deferrals: Illuminating the Intricacies of State and Local Government Accounting.Real-Time Results: How Dashboards Can Help You Move Your Small Business.How to Be Prepared With a Business Continuity Plan.State Tax Considerations for Insurance Companies.Nine Questions About GASB Statement 102 on Risk Disclosures.Ensuring Financial Integrity in Church Operations.Crafting an Effective Nonprofit Document Retention Strategy.Stay Vigilant to Reduce the Risk of Occupational Fraud.Contact us today to learn how we can assist your team with best practices in credit memos for your next examination or review. Furthermore, this is an excellent opportunity to evaluate if the rate earned is in line with the risk assumed.ĬRI’s financial institution professionals have extensive experience in providing value-added consulting services to community banks across the southern United States. Terms that are unusual or outside of policy increase the credit risk of the loan. Sources and uses of the loan proceeds also provide good information about the purpose of the loan. If there are covenants, clearly explain what is required and how those will be monitored. Conditionsĭocument the origination amount, maturity date, interest rate (fixed/variable, index, spread, floor, ceiling), amortization schedule, call code, risk rating, and more. The lower the LTV/LTC ratio, the more skin the borrower has in the collateral, thus reducing credit risk. Whatever secures the loan, notate if the LTV/LTC is within or outside of policy. For purchase money loans, document the purchase price and present loan-to-cost (LTC). For real estate loans, the basis for the valuation should be noted ensure value aligns with the interagency guidance for real estate appraisals. If the loan defaults and the bank repossesses the collateral or if the borrower must sell the collateral to repay the debt, it is necessary to document the asset’s value and loan-to-value (LTV) ratio. The more capital a borrower has the less risk to the institution. Cash and investments are noted on the most recent tax return or financial statement and total liquid assets at the time of approval. If the borrower has problems generating cash to service the loan in the future, do they have enough cash on hand to supplement income shortfalls? Documenting cash held in the institution is important. How much additional liquidity does the borrower have? The closer the DSC ratio is to 1.0x or the higher the DTI ratio is, the more the risk increases for the credit. Current debt payments combined with new debt should be included. Pro forma information can also be considered (such as expected future earnings). Cash flow, or earnings before interest expense, taxes, depreciation, and amortization (EBITDA), should be calculated and documented based on the past 3-5 years of tax returns or financial statements. Commercial loans generally utilize the debt service coverage (DSC) ratio. For consumer loans, it is common to calculate debt-to-income (DTI) ratio considering current debt load, additional debt, and current earnings. How is the borrower planning to service the debt?ĭocumenting the ability to service the debt as agreed is critical. The credit risk increases the more problems a borrower has shown in the past. Finally, the deposit history should be evaluated and included if the borrower has a history of overdrafts and NSF items, this information should be noted. Information such as the credit score, past due history, public records can help evaluate the borrower’s character. This should include previous credit performance with the bank or the borrower’s history with the lender at other institutions if the officer is new to the institution. What is the Bank’s history with the borrower? However, by including each of these elements in your credit memo, you can meet regulatory requirements and assist in monitoring credit risk. These principles have existed for years but aren’t always applied in the documentation. Below are the “five C’s” of credit that can be used in the underwriting documentation. Credit memos can be simple yet provide a road map to help someone other than the loan officer understand the nature of the credit.
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