DEPARTMENT OF AUDIT
DIVISION OF BANKING
(307) 777-7797 Fax (307) 777-3555 Email: firstname.lastname@example.org
Jeffrey C. Vogel
To: Chief Executive Officer
All State Chartered Banks
From: Michael E. Williams, Deputy Commissioner
Division of Banking
Date: April 2, 2004
following guidance on credit underwriting and administration practices will be
This guidance will supersede the memorandum of June 1, 1998. Copies of this memorandum should be
distributed to all lending personnel.
importance is placed on the bank’s written policies, as they are the governance
for bank management
as set forth by the directorate. Examiners will review the loan policy to ensure that it is clear, concise and
above all, prudent. Once this is determined, the bank will be examined for compliance with the policy.
History has proven that banks with high percentages of documentation exceptions have experienced severe
problems in their loan portfolios. Each bank should set forth in its loan policy its documentation
requirements for loans.
the absence of specific documentation requirements, examiners will utilize the
detailed in this memorandum for determining exceptions. Loan documentation exceptions will be discussed
with management prior to the exit meeting. The final listing will generate the percentage used in the report
of examination. The percentage is based on the dollar volume of exceptions divided by the dollar volume
of loans reviewed.
the primary collateral is a real estate mortgage on commercial or residential
property, an appraisal
or evaluation should be done within one year prior to the initial disbursement of loan proceeds. In
addition, lien searches or title policies should be obtained to ensure and document the lien position.
the primary collateral is accounts receivable or inventory, an aging schedule
or valuation listing
should be in the credit file. The schedule or listing should be obtained at origination or renewal and
updated at least semi-annually. Loans secured by other types of collateral should have a current listing
and evaluation of the collateral at origination and renewal dates.
3. Financial statements should:
· Be dated as to the date of financial condition;
· Total and balance;
· Tie to the subsidiary schedules; and
· Be signed and dated by all parties listed.
4. Current financial statements are required except in the following instances:
· Term amortizing loans (only required at origination or renewal);
· Residential real estate loans (only required at origination or renewal);
· Borrowers in bankruptcy; and
· Loans secured in total by deposits and/or U.S. Government Securities.
and corporate financial statements should be obtained not more than fourteen
the last statement date or upon renewal of the note.
loan with guarantees should have current financial statements on each guarantor
at origination and
each renewal date.
operating and unsecured loans should have a complete tax return in the credit
file unless CPA-prepared
financial statements are available. Management is encouraged to obtain tax returns for all types of loans.
tax return is considered stale if it is not in the file within sixty days after
its filing deadline. If the
borrower filed an extension, a copy of the extension should be obtained.
9. Annually, all operating loans should have a budget and a cash flow statement.
10. Any loan to a start-up business should have pro-forma balance sheets and income statements.
secured by improved real estate or personal property should have proof of
insurance in the file
with the bank shown as loss payee.
12. All floor plan loans should have inspections done at least quarterly.
13. Loans secured by livestock should have annual inspections.
and evaluations should meet the federal appraisal regulations as well as the
forth in the Interagency Appraisal and Evaluation Guidelines, dated October 27, 1994 and the Interagency
Statement on Independent Appraisal and Evaluation Functions, dated October 27, 2003.
an appraisal is not required, an evaluation may be utilized. A bank should establish prudent standards
for the preparation of evaluations. Qualified persons who are capable of rendering unbiased opinions
should perform evaluations. While the individual performing an evaluation need not be a state certified
or licensed appraiser, the bank is not precluded from using a certified or licensed appraiser to perform
evaluations. An evaluation must be in writing and should contain sufficient documentation to substantiate
the basis for the value reported for the real estate. The depth and detail of analysis in evaluations should
be consistent with the complexity of the property, as well as, the bank’s exposure in the transaction.
At a minimum, an evaluation should:
· Be written;
· Include the preparer’s name, signature, and the effective date of the evaluation;
· Describe the real estate collateral, its condition, its current and projected use;
· Describe the source(s) of information used in the analysis;
· Describe the analysis and supporting information;
· Provide an estimate of the real estate’s market value, with any limiting conditions, and;
· Include calculations, supporting assumptions, and a discussion of comparable sales.
In order for real estate to be considered an abundance of caution the following must apply:
bank’s position must be fully protected by other collateral and the file
documented that the
real estate is being taken as additional collateral.
· The extension of credit must be well supported by income.
the real estate is the only collateral, then the borrower must be worthy of
unsecured credit in
conformance with the bank’s loan policy and the file documented that the real estate is being
taken as an abundance of caution.
Tax assessments may be used solely as an estimate of value if the following elements apply:
used for home equity lines of credit or second real estate mortgages on the
residence when the sale of the collateral is not the primary source of repayment.
is used for non asset-based loans when used in conjunction with an analysis of
· Bank management is satisfied the assessment represents the fair market value of the property.
a bank may not secure new loans with existing mortgages from earlier
transactions unless the
· The contract terms must obligate future advances from the inception of the loan.
earlier mortgage may be used to secure a new loan if the mortgage is amended to
show the new
money advanced. However, investigation of the bank’s lien position would be necessary.
portion of an agricultural loan which is secured by livestock or crops will
generally be withheld
from adverse classification. However, the bank must have properly perfected and
security interest in the assets in question, and the bank must have
satisfactory practices for
controlling sales proceeds when the borrower sells livestock and crops. The livestock or crops must
have a signed independent on-site inspection and the results must be documented.
The following are guidelines for acceptable inspections:
not more than 90 days prior to the examination start date for feeder livestock
and for purposes of confirming crops inventories.
· Performed not more than six months prior to the examination start date for breeder stock herds.
of invoices or bills or sale within the respective three months and six months
above are an acceptable substitute for inspection reports.