written by Blair Groves
It’s not uncommon for bankers to make exceptions to policies and variances to procedures. But problems can arise when banks don’t make a clear distinction between exceptions and variances and track them consistently.
Procedures guide the processes used by bankers to underwrite and approve loans. They include maximum loan amounts, financial statement requirements, terms and the use of ratios like debt service coverage and loan-to-value when making lending decisions. Variances from procedures should require approval from the next highest management level up from the commercial lender that is making the loan.
Policies are rules regarding what your bank will and won’t do when it comes to lending. For example, your policy might state that you won’t make loans outside of your defined market area or to businesses in certain industries. Therefore, exceptions to bank policy should be rare and require a higher level of bank approval.
The approval of exceptions and variances should be tracked on a regular basis and reviewed by credit administration and reported to the board. The report should answer the following:
• How many and what types of exceptions and variances are occurring?
• Are they concentrated among certain types of loans or within certain markets?
• Are certain lenders making all or most of the exceptions and variances?
By tracking exceptions and variances, you can spot trends that might indicate potential or future problems. For example, do you have a lender who needs reigning in? Or do you need to train and educate your lenders about the right way to make exceptions and variances?
Perhaps most importantly, tracking and reporting will provide the data you need to determine if the current level of exceptions and variances is acceptable. If not, you may want to consider adjusting your exception and variance guidelines.
Contact us if you have more questions about reporting for exceptions and variances 417-881-0145.