Policy and procedures importance of updating
Consistent with the lending strategy, the board should identify not only which types of loans are permissible and impermissible but also the types of loans the bank will and will not underwrite regardless of permissibility.
The box to the right outlines some of the more common loan types found in community banks.
Participation arrangements should be established before the credit is ultimately approved.
Participations should be done on a nonrecourse basis, and the originating and purchasing banks should share in the risks and contractual payments on a pro-rata basis.
A bank may choose to enter into participations if it is unable to generate sufficient loan demand independently.
If the lending staff members do not have the expertise to underwrite, service, or monitor certain loan types, the bank should not undertake such activities.
The most common type of loan participation generally shares profits and losses on an equal basis; therefore, relying solely on the lead banks’ analysis and not conducting independent, thorough analysis is imprudent.
Adequate financial analysis and due diligence must be performed prior to entering into any participations.
The policy should also state that engaging in the financing of illegal or illicit activities is unacceptable.
Policies and procedures need to be continually evaluated and updated.