Loan Origination Processes and Challenges Part 3 – Commercial Loans

For many financial institutions and, in particular, community banks, commercial loans represent the lifeblood of the organization. Commercial loans provide a key ingredient in determining organizational profitability. The loan origination process is often fraught with inefficient processes created through both regulatory and non-regulatory procedures.

Regulatory requirements are designed to help financial institutions manage their risk environment within their commercial lending environments. In some cases, regulatory issues may seem overhanded and create additional waste in the process. However, organizations are limited in their ability to reduce or eliminate regulatory waste.

The Costly Process of Loan Origination 

In addition to regulatory requirements, financial institutions create their own processes and procedures to move a commercial loan from origination to closing. Some processes are to work within the regulatory framework, while others are designed by institutions to create a seamless origination process. However, in creating additional processes beyond regulatory requirements, inefficiencies creep into the process. What started as a seamless process to originate a commercial loan becomes a time-consuming, costly process.

Most organizations follow a very similar process to each other. Commercial lenders meet with business leaders who express a desire to borrow money for one need or another. Once this need is understood, the commercial lender begins the origination process by creating a credit memo about the deal. Based on the size and type of loan, the loan may flow to a credit analyst who analyzes a number of key aspects about the business to understand whether the institution should lend money to this particular borrower.

If an analyst or the lender determines that the loan is an appropriate risk for the institution, the loan then goes to management for approval. Depending on note size and institution requirements, the approval process may be simple requiring a manager’s signature or more complex requiring review by loan committee or even the board of directors. Once approved, the note and other documentation must be created and the loan booked.

Any of these process steps may encounter errors and issues along the way. However, some institutions seem have much greater issues that create delays resulting in customer frustration and increased costs of the process. As an efficiency consultant, I find many financial institutions are unaware of the issues created throughout their processes.

For example, a common issue raised with many client organizations is the lack of care that is apparent among lenders. In most of our client organizations, the document preparation function for commercial loans usually resides in the loan operations function. Lenders regularly complain that the document prep process takes entirely too long. It may be several days or longer before a document arrives back ready for a borrower’s signature. The primary driver of this delay often stems from errors created early in the process by lenders, loan assistants, or credit analysts that document prep staff catch before preparing the final loan documents.

When an error is encountered, it must go back to the loan assistant who must in turn research the problem and provide corrections. Some documents may encounter several back-and-forth encounters like this. The result? Multiple delays in the process. This is just one example of things we see in our efficiency studies. But, there is plenty of finger-pointing across the value chain to fill several pages of material.

How SLAs Can Limit Risk

One of the biggest ways to prevent these kinds of issues from occurring is to create Service Level Agreements or SLAs across the various functions. SLAs help define the expectations of codependent functions and create a service standard to drive performance. Lenders can use SLAs to create expectations of when a loan document should be returned back to them. Document prep staff would in turn use those same SLAs to create quality expectations so that they can turn documents around within expected windows.

SLAs are not one-sided metrics. Too often, organizations create SLAs from a single point of view. For instance, at one recent client, the credit administration group maintained a service level of 3 to 5 days to turn a loan review request around based on dollar value. The commercial lending group was not happy with these SLAs but felt that they could not dictate what another group does.

Best practice organizations will negotiate SLAs like these so that both lenders and credit administration create a win-win situation for both parties and ultimately the financial institution. Creation of SLAs require the communication and cooperation of all functions related to the service in question. Everyone should agree on the service standards with the best interests of the financial institution and the borrower in mind.

To learn about different types of loan processes please read my other 2 blogs in the series:

Loan Origination Processes and Challenges Part 1 - Consumer Loans

Loan Origination Processes and Challenges Part 2 - Mortgage Loans