Credit Evaluation School, Sacramento, CA

• The addition of new loan products by an institution is not by itself a red flag. • The addition of new loan products without the expertise to properly underwrite and monitor the new products is a problem. • Specialized loan require the proper expertise to manage the risk inherent in those loans. This is a loan administration red flag.

New Loan Products

Lack of Collateral Inspections

• With certain types of lending, such as asset-based lending or where borrowing base guidelines are in place, there is a need to have regular collateral inspections. • Borrowing availability under the line of credit is tied directly to the value of the collateral. • In order to ensure proper collateral coverage ratios, the collateral must be periodically inspected and validated.

Annual Clean-up of Operating Lines of Credit

• This requirement is no longer typically seen in community banks offering lines of credit. • May still see this in larger more complex credits or with Ag lending. • It’s a problem in a situation where a portion of the line of credit balance becomes permanent working capital and is unable to be paid off with operating cashflow. • Banks many time will analyze the businesses cashflow and pull out a portion of the line of credit balance to term out over a longer time period to free up the line of credit availability.