Every borrower knows that before his/her application is approved, he/she must pass a credit check. Few people imagine the procedure with their own eyes, but the decision is always expected with excitement. It is made by a group of authorized specialists – the credit committee. Their purpose is to determine the policy of the financial institution in relation to risks, types of lending and other vital processes. Let’s consider what a credit committee is and how it works.
Basic principles of bank lending: expertise and scoring
The issuance of loans is a rather mundane procedure. It has been polished by years of practice, trial and error but, in fact, everything is simple. When the bank receives a loan application from a client and a package of established documents, it proceeds to analyze the solvency of a potential borrower.
The primary analysis of information can be carried out both manually and automatically.
The first option is the lot of an ordinary specialist loan officer. The second is artificial intelligence, a scoring computer program. Where the application, questionnaire and package of documents will go depends on the cost of the loan, the complexity of the loan program and the volume of claims. When all the information has been thoroughly studied, it is sent to the credit committee for consideration.
The work of the commission is also subject to a number of factors. Their decisions can be both purely official and extremely categorical. The approach depends on the amount of loan funds requested by the client and the degree of its compliance with the bank’s requirements. For example, the verdict of the banking board in relation to an application for a personal loan is pure formality, but the registration of a costly mortgage will be accompanied by the strictest verification.
Composition and functions of the credit committee
The board of the bank forms a council of authorized specialists. Depending on the status of the financial institution (branch, office, main representative office), the credit committee may include from two to five or more persons. Each of them has the right to vote. The commission is headed by the chairman who is appointed by the bank’s management.
In its work, the credit committee relies on the orders of the Federal Reserve System, the central bank of the United States, and the internal rules of the financial institution. Authorized specialists consider applications from customers (individuals and legal entities) and make appropriate decisions.
Typically, the credit commission includes the following officials:
- Loan officer (analyst);
- Chief Accountant;
- Director of security;
- Chairman (representative of the management);
Depending on the specifics of decision-making, the ranks of authorized employees can be replenished: a lawyer, a specialist in the pledge service and other bank employees. The credit committee meets once or twice a week. The decision is taken by a majority vote of the sitting people. Often, meetings are held in selector mode using telephone and video communication technologies. Decisions are made rather quickly since at the time of their approval, each member of the committee is aware of the conclusion of all bank services in relation to the application under consideration.
Credit Committee credo: interests of the borrower or the bank?
The meeting of the commission opens the report on the applicant for a loan. This document is prepared by a specially appointed employee. The presentation must include the data specified by the borrower in the questionnaire and the appraisal conclusions that are given by the bank’s services: credit department, risk department and security service. Based on this information, a decision is made by the members of the credit board. Authorized employees pay particular attention to the following points in the client’s statement:
- size of wages;
- place of work;
- marital status;
- credit history, etc.
In addition to personal data, some subjective realities are taken into account. At first glance, such insignificant nuances as appearance, demeanor, speech, etc. can influence the decision of the credit committee.
The advice’s conclusion can be positive, negative, and conditionally positive. The latter means that the client can apply for the declared loan but only on the condition that some additional requirements are met. We are talking about a possible decrease in the volume of credit funds, the provision of additional loan security (collateral, guarantors), or an additional package of documents.
The decision of the credit committee is recorded in the minutes. The document remains under the control of the bank, and a copy of it supplements the borrower’s file. This approach facilitates the work of subsequent commissions.
The credit committee reviews more than just loan applications. They also administer affairs of careless clients who were unable to repay the loan. Only full assistance to bank specialists, decency and honesty can save you from litigation and other, often harmful consequences of insolvency. Remember that financial institutions strive to stay away from costly lawsuits and cooperation with collection agencies. To settle force majeure situations, banks have introduced such concepts as loan restructuring, extension and other approaches that can resolve the relationship between a faulty borrower and a lender.