CDFI Loan
Policies and Procedures
Developed and delivered by
Portfolio Management Series Webinar
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
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
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
Establishing a Loan Policy
Know Your Objective
Why are you writing loan policies?
Who is your audience?
1. Staff
2. Board
3. Outside reviewers
4. All of the above
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
Twelve Elements of a Good Loan Policy
1. Clear mission
2. Specify lending authority
3. Delineate responsibilities for reporting loan information
4. Describe origination, underwriting criteria and process
5. Documentation for complete application and complete credit
file
6. State who maintains credit files
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
Twelve Elements of a Good Loan Policy
7. Collateral guidelines
8. Loan rating and loss reserves
9. How interest rates and fees are set
10. Preferred upper limit for total loans outstanding/
concentrations
11. Describe trade area
12. How to detect, analyze, and work out problem loans
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
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
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
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
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
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
Example
Large Loan Fund/Complex Loan Amount Relationship Delegated
Exposure Approval
Authority
< $1,000,000 < $2,000,000 Chief Credit
Officer
> $1,000,000 < $2,000,000 CCO & CEO
> $2,000,000 >$2,000,000 Loan Committee
Other examples:
– All loans go to loan committee
– Staff approves up to small dollar
amount
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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?
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
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
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
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
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
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
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
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
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
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
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
Considerations/Questions
How to increase compliance with this requirement?
– “Clean-Up Day”
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
Twelve Elements of a Good Loan Policy
Guidelines for taking, evaluating, and perfecting loan
collateral
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
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:
1. A letter of appraisal updating a previously completed fully
documented appraisal
2. 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.
3. A form appraisal prepared by a licensed real estate appraiser.
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
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
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
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
Example
1. 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%)
2. Average Risk – Collateral, cash flow and credit cover loan (LTV 90%)
3. Substantial Risk – Tight collateral coverage or cash flow of debt service
is tight (less than 1.05)
4. High Risk – Payments 30 days past due, weak financial condition,
uncooperative borrowers, non-existent financial reports, external events
with serious negative impacts, possible workout
5. 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
Linking Risk Rating to Reserves
Risk Rating Reserve
1 3%
2 5%
3 10%
4 20%
5 50% or more – determined per loan
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
Twelve Elements of a Good Loan Policy
Guidelines for rates and terms on loans
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
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
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
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
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
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
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
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
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
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
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
Lending Control Functions
1. Audit Functions
2. Loan Review
3. Portfolio Review
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
Lending Control Functions
Audit Functions
• Does your auditor review credit files?
• What do they look for?
• Do you ask them for their results?
Lending Control Functions
Loan Review
• Assesses individual loans including repayment risks
• Determines compliance with loan policies
• Identifies lapses in documentation
• Evaluates the risk rating
Lending Control Functions
Portfolio Review
• Aggregates data on portfolio
• Measures against defined portfolio limits
• Helps identify risk at a more macro level
Considerations
Determine frequency
Determine who does the work
Consider impact on staff/workflow
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
Sample Loan Policy Table of Contents
1. Introduction
2. Mission Statement
3. Scope of Services
4. Loan Limits
5. Interest Rates and Fees
6. Loan Approval Authority
7. Loan Origination Standards
8. Modifications and Extensions
9. Credit and Security Standards
10. Risk Rating Classifications
11. Underwriting Standards
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
Sample 2 –Table of Contents
I. Mission
II. Introduction
III. General Provisions
IV. Loan Committee: “Special Program 1”
V. Loan Committee: “Special Program 2”
VI. Standard Lending – purpose, eligibility, terms security,
closing costs, environmental risk, escrows, commitment
process, denial of applications,
VII. Lending Criteria and Procedures
VIII. Loan Servicing & Collections
IX. Exception of Lending Policy
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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
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:
http://www.carseyinstitute.unh.edu/CDFI-webinars.html
For more information about the CDFI Capacity Building Initiative,
visit:
http://www.cdfifund.gov/
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
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 http://www.cdfifund.gov/cbi 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, email:
[email protected] or
[email protected]If you have not taken the survey, please do so at the following
link:
http://www.unh.edu/survey-center/cdfi.html
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
CDFI Loan Policies and Procedures
Thanks for being with us today!
CDFI Fund Capacity Building Initiative Loan
Policies and Procedures
