Loan File Documentation

by Nancy Castiglione, CRCM

Here’s the PROBLEM. You are anticipating a regulatory exam or an audit, and in preparation, you pull some files to get an idea of how things look before the actual review takes place. You want to be prepared. What you find is what you did not want to find. You find files that are lacking complete documentation to support the credit decision that was made. There is insufficient information in the credit file to allow you (the un-involved reviewer) to understand how the decision was made to approve or de

ny the loan request. If you can’t follow the trail (however cold it is by now), it is even more likely that the examiners or auditors will also not be able to understand how the loan decision was made.

The immediate SOLUTION is to find the lender that made the loan or denied the application and ask them what they recall about the applicant and the circumstances of the loan request. There’s a good chance that the lender’s memory is not good enough to remember every loan applicant and loan request in detail to be able to provide all of the missing particulars. There’s also a good chance that the lender that was assigned to that loan is no longer available.

The BETTER SOLUTION is to take steps to ensure that good loan documentation happens when the application is taken and while the loan is being underwritten.

Rule number 1: If it isn’t written it didn’t happen!
Rule number 1 is not only the golden rule of compliance it is the first rule of good loan documentation. If it isn’t written down, it didn’t happen.

The loan application should be completed completely.
You probably have well-constructed loan application forms and procedures for every type of loan request. They have been designed to obtain necessary information to be used to evaluate loan requests. Applicants do not always fill out loan applications the way they are intended or may leave some sections blank that they do not understand or do not want to answer. It is the lender’s job to assist applicants in completing the necessary information or documenting any acceptable exception reason for not doing so. If application information is not provided in the initial application, someone has to follow-up with the applicant to obtain the information to add it later and the information must be documented as to what was received and when it was received, which can change the date of the completed application for purposes of Regulation B.

Some portions of an application form may not be as crucial as others. For example, if the applicant does not list all credit references on the application, the determination may be made that it is unnecessary because a credit report will be obtained that will reveal all credit accounts in the applicant’s name (then, maybe that information does not need to be included on the application form). Certainly, it is important that the applicant provide crucial information that permits your institution to verify their identity and to document the loan purpose, the loan amount, and the type of loan being requested. It is also important to be consistent in how you handle incomplete applications. If you deny an applicant for an incomplete application, you must ensure that you do so fairly and consistently and use objective criteria.

Who is(are) the Applicant(s)?
One of the most important pieces of the loan file documentation puzzle is the memorialization of the applicant or applicants for the loan request. If the number of borrowers on the loan note does not match the application request, questions will arise about whether additional signers were required and why.

Under Regulation B, the term “joint applicant” refers to someone who applies contemporaneously with the applicant for shared or joint credit. It does not refer to someone whose signature is required by the creditor as a condition for granting the loan request. There must be evidence of a person’s intent to apply jointly with the applicant at the time of the application.

Applicants don’t always play by the rules. A loan application may be initiated by one applicant with the intent that the second applicant will follow along when available. An individual loan applicant may later decide to add a joint applicant to a loan application that was previously submitted. As the applicants are adjusted throughout the application process, the file must be documented to reflect the changes and the timing of the changes.

Justifiable Reasons for Denial or Counteroffer
A good exercise to conduct is to challenge participants to try to determine the reasons for adverse action of another lender’s loan request based on the information in the file. Even without the notice of adverse action, the reasons for adverse action should be clear from the documentation in the file.

Fair and consistent treatment
Last but not least, the most important reason for ensuring complete and accurate loan documentation is to be able to demonstrate that loan decisions are being made fairly and consistently in accordance with the institution’s credit policy and underwriting standards.

EDITOR’S NOTE:
For those of you with great memories, this article takes inspiration from an ActionTraining article written by Lucy Griffin 21 years ago titled: Documentation: Right from the Start.

Copyright © 2021 Compliance Action. Originally appeared in Compliance Action Vol. 26, No. 2, 6/24/2021

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