Loan Committee: What it is, Determining Loan Quality

What Is a Loan Committee?

A loan committee is the lending or management committee of a bank or other lending institution. It generally consists of upper-level officers with management authority. The loan committee analyzes and subsequently approves or rejects any loan that the initial loan officer does not have the authority to approve, typically those of large sizes or higher risk. The committee ensures that the loan meets the institution’s standard lending policy. If it does, the committee can agree to fund and disburse the loan with a binding commitment.

Understanding a Loan Committee

A loan committee is usually responsible for regular credit reviews of the bank’s maturing loans, which are the ones whose terms are nearing completion and are up for renewal. For example, a 10-year loan in its ninth year would be a maturing loan and up for renewal if the borrower is interested in extending the loan. At times, a bank may extend the original credit facility, however, the loan committee must ensure that this is done in accordance with proper procedure. For the bank, it is important to make sure that the borrower’s creditworthiness has not deteriorated.

In addition to reviewing maturing loans, a loan committee is responsible for reviewing new loans that may be large, complex, or come with a high risk. These types of loans are usually above the authority of the initial loan officer and require the approval of upper management, such as the chief risk officer (CRO) and chief financial officer (CFO).

Determining Loan Quality

To determine the creditworthiness of a borrower, a loan committee will conduct a valuation that includes factors such as the borrower’s past repayment history and credit score, along with the value of assets and liabilities on the individual’s balance sheet, the purpose of the loan, the risks of the industry the individual or firm operates in, forecasting models, and other information that will paint a clear picture of the potential risks of the borrower. A loan committee analyzes and subsequently approves or rejects the loan. It may also approve the loan but with completely different terms than the borrower intended, which will mitigate any risks.

The three credit reporting agencies in the United States are Experian, Transunion, and Equifax, that report, update, and store consumers’ credit histories, which loan committees incorporate into their decision to extend credit to a single borrower. The five main factors that these agencies use when calculating a credit score are payment history, the total amount owed, length of credit history, types of credit, and new credit.

Collecting on a Loan

A loan committee also determines which collection action should be taken on past-due loans. Depending on the policy of the lending institution, once a borrower has missed their due date, the committee can either immediately charge a late fee or allow the borrower to enter a grace period.

To bring the account up to good standing, the borrower must make the required minimum monthly payments, including any late fees. Individuals or businesses that are 30 days behind schedule on loan payments will usually find that the delinquent account has affected their credit report.

Finally, a loan committee will also be charged with making sure that the bank is compliant with all regulations. This can include not only lending procedures but also bankruptcy and receivership issues and even extend to the review of marketing materials that are provided to potential customers.