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CDFI Loan Policies and Procedures Portfolio Management Series Webinar

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Presentation on theme: "CDFI Loan Policies and Procedures Portfolio Management Series Webinar"— Presentation transcript:

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

2 There will be time for questions throughout
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 Policies and Procedures

3 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

4 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

5 Establishing a Loan Policy
Know Your Objective Why are you writing loan policies? Who is your audience? Staff Board Outside reviewers All of the above If we are doing something different than what the policies say, do we need to change our policies or do we need to change how we are doing things? New CDFI Revising existing policies and procedures Too stringent/too lenient Not detailed enough CDFI Fund Capacity Building Initiative Loan Policies and Procedures

6 Twelve Elements of a Good Loan Policy
Clear mission Specify lending authority Delineate responsibilities for reporting loan information Describe origination, underwriting criteria and process Documentation for complete application and complete credit file State who maintains credit files CDFI Fund Capacity Building Initiative Loan Policies and Procedures

7 Twelve Elements of a Good Loan Policy
Collateral guidelines Loan rating and loss reserves How interest rates and fees are set Preferred upper limit for total loans outstanding/ concentrations Describe trade area How to detect, analyze, and work out problem loans CDFI Fund Capacity Building Initiative Loan Policies and Procedures

8 Twelve Elements of a Good Loan Policy
A clear mission statement for the CDFI’s loan portfolio CDFI Fund Capacity Building Initiative Loan Policies and Procedures

9 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. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

10 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. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

11 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. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

12 Considerations/Questions
Board approved/board review Confidentiality Rigidity – guidelines or policies? General quality of loans Amount of detail of policies CDFI Fund Capacity Building Initiative Loan Policies and Procedures

13 Twelve Elements of a Good Loan Policy
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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

14 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 CCO & CEO > $2,000,000 >$2,000,000 Loan Committee CDFI Fund Capacity Building Initiative Loan Policies and Procedures

15 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? Should staff approved loans go to Loan Committee CDFI Fund Capacity Building Initiative Loan Policies and Procedures

16 Twelve Elements of a Good Loan Policy
Lines of responsibility for making assignments and reporting information within the lending division CDFI Fund Capacity Building Initiative Loan Policies and Procedures

17 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. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

18 Considerations/Questions
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? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

19 Twelve Elements of a Good Loan Policy
Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications CDFI Fund Capacity Building Initiative Loan Policies and Procedures

20 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

21 Considerations/Questions
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? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

22 Twelve Elements of a Good Loan Policy
The required documentation that accompanies each loan application and what must be kept in the CDFI’s credit files CDFI Fund Capacity Building Initiative Loan Policies and Procedures

23 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

24 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? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

25 Twelve Elements of a Good Loan Policy
Lines of authority within the CDFI detailing who is responsible for maintaining and reviewing the credit files CDFI Fund Capacity Building Initiative Loan Policies and Procedures

26 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

27 Considerations/Questions
How to increase compliance with this requirement? “Clean-Up Day” CDFI Fund Capacity Building Initiative Loan Policies and Procedures

28 Twelve Elements of a Good Loan Policy
Guidelines for taking, evaluating, and perfecting loan collateral CDFI Fund Capacity Building Initiative Loan Policies and Procedures

29 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.” CDFI Fund Capacity Building Initiative Loan Policies and Procedures

30 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: A letter of appraisal updating a previously completed fully documented appraisal 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. A form appraisal prepared by a licensed real estate appraiser. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

31 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

32 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? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

33 Twelve Elements of a Good Loan Policy
Establish a risk rating system and loan loss reserves CDFI Fund Capacity Building Initiative Loan Policies and Procedures

34 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures 34

35 Example 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%) Average Risk – Collateral, cash flow and credit cover loan (LTV 90%) Substantial Risk – Tight collateral coverage or cash flow of debt service is tight (less than 1.05) High Risk – Payments 30 days past due, weak financial condition, uncooperative borrowers, non-existent financial reports, external events with serious negative impacts, possible workout Work-Out – Payments 60 days past due, value of collateral or guarantee is less than loan CDFI Fund Capacity Building Initiative Loan Policies and Procedures 35

36 Linking Risk Rating to Reserves
1 3% 2 5% 3 10% 4 20% 5 50% or more – determined per loan CDFI Fund Capacity Building Initiative Loan Policies and Procedures 36

37 Considerations/Questions
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? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

38 Twelve Elements of a Good Loan Policy
Guidelines for rates and terms on loans CDFI Fund Capacity Building Initiative Loan Policies and Procedures

39 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. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

40 Considerations Document how rates and fees are set and other pricing considerations are set. Is there a regular review of fees, rates and terms? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

41 Twelve Elements of a Good Loan Policy
A statement of the preferred upper limit for total loans outstanding, portfolio mix and concentrations CDFI Fund Capacity Building Initiative Loan Policies and Procedures

42 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

43 Considerations/Questions
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. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

44 12 Elements of a Good Loan Policy
A description of the CDFI’s principal trade area from which most loans should come. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

45 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. CDFI Fund Capacity Building Initiative Loan Policies and Procedures

46 Considerations How will you allow exceptions?
Will you follow an existing customer outside your geographic area? How will you track and report exceptions? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

47 Twelve Elements of a Good Loan Policy
A discussion of the preferred procedures for detecting, analyzing and working out problem loan situations CDFI Fund Capacity Building Initiative Loan Policies and Procedures

48 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) CDFI Fund Capacity Building Initiative Loan Policies and Procedures

49 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? CDFI Fund Capacity Building Initiative Loan Policies and Procedures

50 Lending Control Functions
Audit Functions Loan Review Portfolio Review CDFI Fund Capacity Building Initiative Loan Policies and Procedures

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

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

53 Lending Control Functions
Portfolio Review Aggregates data on portfolio Measures against defined portfolio limits Helps identify risk at a more macro level

54 Considerations Determine frequency Determine who does the work
Consider impact on staff/workflow CDFI Fund Capacity Building Initiative Loan Policies and Procedures

55 Sample Loan Policy Table of Contents
Introduction Mission Statement Scope of Services Loan Limits Interest Rates and Fees Loan Approval Authority Loan Origination Standards Modifications and Extensions Credit and Security Standards Risk Rating Classifications Underwriting Standards CDFI Fund Capacity Building Initiative Loan Policies and Procedures

56 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures

57 Sample 2 –Table of Contents
Mission Introduction General Provisions Loan Committee: “Special Program 1” Loan Committee: “Special Program 2” Standard Lending – purpose, eligibility, terms security, closing costs, environmental risk, escrows, commitment process, denial of applications, Lending Criteria and Procedures Loan Servicing & Collections Exception of Lending Policy CDFI Fund Capacity Building Initiative Loan Policies and Procedures

58 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 CDFI Fund Capacity Building Initiative Loan Policies and Procedures 58

59 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: For more information about the CDFI Capacity Building Initiative, visit: CDFI Fund Capacity Building Initiative Loan Policies and Procedures 59

60 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 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, or If you have not taken the survey, please do so at the following link: CDFI Fund Capacity Building Initiative Loan Policies and Procedures 60

61 CDFI Loan Policies and Procedures
Questions? You can me at Thanks for being with us today! CDFI Fund Capacity Building Initiative Loan Policies and Procedures 61


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