Keeping exceptions to a minimum is an important priority for mitigating risk, ensuring compliance, and encouraging efficient operations. But, what exactly is an exception?
At Alogent, we like to think of exceptions as items that require attention because they fail to meet predetermined requirements. Missing documentation is a prime example, but exceptions also occur as past-due tasks, incomplete records, and decisions that conflict with internal policies.
Practically every department at a financial institution could encounter exceptions, but commercial lending tends to be a major source. This article discusses four key exceptions to monitor for commercial lending:
- Credit exceptions.
- Loan exceptions.
- Collateral exceptions.
- Policy exceptions.
Exception Terminology For Business Lending
Credit Exceptions
Unlike individuals, most businesses do not have a readily accessible credit score. As a result, commercial credit decisions often require considerable upfront analysis to establish creditworthiness. Market conditions can change quickly and could impact the borrower’s ability to repay. As a result, it is common for commercial borrowers to provide documentation throughout the life of the loan. Updated financial statements, tax returns, and other records help form a clear picture of the borrower’s creditworthiness. Failing to obtain fresh documentation about the borrower leads to credit exceptions (and risk) for the financial institution.
Loan Exceptions
Credit and loan exceptions may be closely related, but, for the purpose of this article, we use the term “loan exceptions” to refer to items that pertain specifically to loans. Loan exceptions can occur before or soon after closing, such as when a loan admin forgets to obtain trailing documents that are necessary for perfecting the loan file. A more common scenario, however, involves remembering to collect proofs of insurance and other documents that expire months or years down the road.
Collateral Exceptions
Maintaining a lien position on equipment, crops, inventory, and other untitled collateral involves filing UCC (Uniform Commercial Code) financing statements in the correct states. Such filings expire, which means financial institutions must regularly file continuations to maintain proper lien positions. Failing to take action in a timely manner leads to collateral-related exceptions and, if not resolved, loss of lien position.
Policy Exceptions
A financial institution’s loan policy sets forth guidelines for how and to whom it lends. Lending decisions that fall outside of the loan policy are known as policy exceptions. Making loans to a business beyond the institution’s preferred geographic area is an example of a loan policy exception. Careful tracking of loan policy exceptions is key, especially from a compliance standpoint.
Tracking Commercial Loan Exceptions
Financial institutions employ a variety of techniques and technologies to manage their commercial lending exceptions, such as:
- Spreadsheets And Tickler Files — Allowing branches, teams, and lenders to track their exceptions in ad hoc systems is common but can pose reporting and data integrity issues.
- Core-Provided Tracking Modules — Some core providers offer tracking capabilities, which may be helpful for standardizing an institution’s exception workflow. Specific features vary among core providers, with some offering minimal or no support for exception management.
- ECM (Enterprise Content Management) Software — Software vendors like Alogent offer purpose-built solutions to streamline exception tracking and management. For example, AccuAccount, Alogent’s ECM that’s optimized for commercial lending, delivers a comprehensive exception management experience. Track credit, loan, collateral, and policy exceptions in a single interface that looks like a traditional loan file. Document images, customer data from the core, and reporting automation support enhanced efficiency, control, and compliance.
Click here to download TicklerTrax, an easy-to-use tool with custom fields and charts. Track missing and expiring documents and simplify compliance and exception management.
Contact Alogent to learn about exception management in AccuAccount.
