Loan File Maintenance: The Importance of Internal Controls

What reports do bank and credit union directors use most often to analyze the performance of the institution's loan portfolio? If you ask enough board members, you’ll find that the “past due loans” report is quite popular. While there are certainly many other reports and credit quality indicators that are utilized, a past due report is key to help identify problem credits that need to be closely monitored. However, a past due report can be manipulated if the bank or credit union does not implement appropriate controls relating to loan file maintenance. In this article, we’ll explore best practices for implementing loan file maintenance controls.

What Is Loan File Maintenance?

Loan file maintenance is the manipulation of the electronic data relative to a loan within the loan subsidiary ledger (system that tracks loan data and integrates with the institution's core system). Loan file maintenance includes the changing of general borrower information, changing of interest rates, movement of payment due dates, and the movement of loan maturity dates.

What Could Go Wrong?

Loan file maintenance could be abused by moving due dates or maturity dates so that the loans reflect as current. This would cause an inaccurate past due report, and in turn, provide inaccurate information to the board of directors. This is often referred to as "ever greening" the portfolio. Management and the board would therefore not have adequate information to make the loan loss allowance decisions.

Internal Control Tips

Appropriate segregation of loan file maintenance abilities is important. Employees with the ability to make loans should typically not have the ability to make master file changes. No lender wants to admit that he or she made a bad loan decision. While we’re not suggesting that all bank and credit union lenders would manipulate due dates, the temptation should be removed. Also, management with financial reporting abilities should not have the ability to transact file changes. Loan file maintenance abilities should be segregated to those employees who input the loans onto the system (e.g. loan processors), and all changes should be reviewed and approved by appropriate levels of management. Loan file maintenance request forms could be a method of documenting the approval and review of changes. Lastly, the bank's or credit union's internal audit function should perform a cursory level review of maintenance changes (via a report generated from the system) on a regular basis as deemed appropriate by the institution.

For additional loan management best practices, browse additional resources on our blog.

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