FDIC TE - Loans Section 3.2 Exam
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Lending Policy - Answers -✔✔ should not be a static document, but must be reviewed
periodically and revised in light of changing circumstances surrounding the borrowing
needs of the institution's customers as well as changes that may occur within the
institution itself.
Loan Review System or Credit Risk Review System - Answers -✔✔ refer to the
responsibilities assigned to various areas such as credit underwriting, loan
administration, problem loan workout, or other areas.
effective loan review system is generally designed to address the following objectives: -
Answers -✔✔ • To promptly identify loans with well-defined credit weaknesses so that
timely action can be taken to minimize credit loss;
• To provide essential information for determining the appropriateness of the ALLL or
ACL for loans and leases;
• To identify relevant trends affecting the collectibility of the loan portfolio and isolate
potential problem areas;
• To evaluate the activities of lending personnel;
• To assess the adequacy of, and adherence to, loan policies and procedures, and to
monitor compliance with relevant laws and regulations;
• To provide the board of directors and senior management with an objective
assessment of the overall portfolio quality; and
• To provide management with information related to credit quality that can be used for
financial and regulatory reporting purposes.
Credit Grading - Answers -✔✔ involves an assessment of credit quality, the
identification of problem loans, and the assignment of risk ratings.
Loan officers - Answers -✔✔ Credit grading systems often place primary reliance on
_________ for identifying emerging credit problems
Credit grading reviews - Answers -✔✔ performed by individuals independent of the
lending function are preferred because they can often provide a more objective
assessment of credit quality.
Loan review system typically incudes: - Answers -✔✔ • A formal credit grading system
that can be reconciled with the framework used by federal regulatory agencies;
• An identification of loans or loan pools that warrant special attention;
,• A mechanism for reporting identified loans, and any corrective action taken, to senior
management and the board of directors; and
• Documentation of an institution's credit loss experience for various components of the
loan and lease portfolio.
Loan review policies typically include: - Answers -✔✔ • Qualifications of loan review
personnel;
• Independence of loan review personnel;
• Frequency of reviews;
• Scope of reviews;
• Depth of reviews;
• Review of findings and follow-up; and
• Workpaper and report distribution.
CECL - Answers -✔✔ Implemented by FASB ASC Subtopic 326-20
Current Expected Credit Losses (CECL) - Answers -✔✔ Financial Instruments - Credit
Losses - Measured at Amortized Cost applies to financial assets measured at amortized
cost, net investments in leases, and off-balance-sheet credit exposures (collectively,
financial assets).
Estimated Credit Losses - Answers -✔✔ an estimate of the current amount of the loan
and lease portfolio (net of unearned income) that is not likely to be collected; that is, net
charge-offs that are likely to be realized for a loan, or pool of loans.
ASC Topic 325 - Answers -✔✔ Established CECL
Board and Management responsibilities for the allowance - Answers -✔✔ • Establish
and maintain a loan review system that identifies, monitors, and addresses asset quality
problems in a timely manner.
• Ensure the prompt charge-off of loans, or portions of loans, deemed uncollectible.
• Ensure that the process for determining an appropriate allowance level is based on
comprehensive, adequately documented, and consistently applied analysis
Appropriate ALL fir Call Report Purposes must consist of: - Answers -✔✔ • The amount
of allowance related to loans individually evaluated and determined to be impaired
under ASC (Accounting Standards Codification) Subtopic 310-10, Receivables -
Overall.
• The amount of allowance related to loans that were individually evaluated for
impairment and determined not to be impaired, as well as other loans collectively
evaluated under ASC Subtopic 450-20, Contingencies - Loss Contingencies.
• The amount of allowance related to loans evaluated under ASC Subtopic 310-30,
Receivables -Loans and
Debt Securities Acquired with Deteriorated Credit Quality.
• The amount of allowance related to international transfer risk associated with its cross-
border lending exposure.
, ASC Subtopic 310-10 - Answers -✔✔ guidance in establishing an allowance for
individually evaluated loans determined to be impaired and measured under that
standard.
Qualitative factors that are likely to cause estimated losses - Answers -✔✔ • Changes
in lending policies and procedures, including underwriting, collection, charge-off and
recovery practices;
• Changes in local and national economic and business conditions;
• Changes in the volume or type of credit extended;
• Changes in the experience, ability, and depth of lending management;
• Changes in the volume and severity of past due, nonaccrual, troubled debt
restructurings, or classified loans;
• Changes in the quality of an institution's loan review system or the degree of oversight
by the board of directors; and
• The existence of, or changes in the level of, any concentrations of credit.
Ratio Analysis - Answers -✔✔ can be useful in identifying trends in the relationship of
the ALLL to classified and nonclassified credits, to past due and nonaccrual loans, to
total loans and leases and binding commitments, and to historical charge-off levels
Accept management's ALLL when they have: - Answers -✔✔ • Maintained effective
systems and controls for identifying, monitoring and addressing asset quality problems
in a timely manner;
• Analyzed all significant factors that affect the collectibility of the portfolio; and
• Established an acceptable ALLL evaluation process that meets the objectives for an
appropriate ALLL.
ASC Subtopic 450-20 - Answers -✔✔ provides the basic guidance for recognition of a
loss from a contingency that should be accrued through a charge to income (i.e., a
provision expense) when available information indicates that it is probable the asset has
been impaired and the amount is reasonably estimated.
Layering - Answers -✔✔ the inappropriate practice of recording estimates in the ALLL
for the same loan under the different accounting standards.
Commercial Loans - Answers -✔✔ Loans to business enterprises for commercial or
industrial purposes, whether proprietorships, partnerships or corporations,
Commercial Lending Policies - Answers -✔✔ generally address acquisition of credit
information, such as property, operating and cash flow statements; factors that might
determine the need for collateral acquisition; acceptable collateral margins; perfecting
liens on collateral; lending terms, and charge-offs.
