Article : Shorter is Better for Credit Approval Memos

During the early 1990s, the US Banking system went through one of its most difficult periods, with thousands of banks failing or being forced into mergers with stronger institutions. The primary reason for this financial stress was poor loan credit quality. There were many factors that contributed to this weak credit profile, and I will not address all of these causes. However, one of the most important contributing factors was weak underwriting at the transaction level. In other words, the officer who underwrote the loan did not complete adequate due diligence, did not conduct an in depth financial analysis, or any number of other fundamental underwriting practices were not completed.

In reaction to the severe credit problems experienced in the Banking System, many appropriate and effective steps were taken in order to prevent a similar problem in the future. Clearly, Banks have learned from their mistakes, and as a result, most analysts believe that the US Banking System's loan credit profile is strong enough to withstand the inevitable economic downturn.

One unfortunate reaction to the historical credit problems, however, is that the length of Credit Approval Memos has grown dramatically. It is not uncommon for Credit Approval Memos to be 15 to 25 pages long, plus numerous attachments. The problems with this approach are as follows:

  • The primary purpose of the Credit Approval Memo is to give Senior Management (who must approve the transaction) the information they need to make an educated decision on the deal. Senior Management's time is limited, and they do not have the time to read such long documents. As a result, the senior approver typically skims the approval memo, and often misses key items. A shorter document which focuses on the key factors that Senior Management needs to know in order to make an informed decision is much more useful.
  • A long Credit Approval Memo forces the underwriting officer to spend too much time writing, and not enough time on the due diligence and analysis required to make a well informed credit recommendation and decision. A shorter Credit Memo allows the underwriting officer to complete a more in depth analysis, reducing the risk that something will be missed. Expense control and productivity are critical standards by which Banks are measured. In light of this, it makes no sense to have underwriting officers allocate a disproportionate amount of time to simply writing up the memo.
  • Too often, an underwriter relies on an Approval Memo Template that requires everything that could possibly be relevant to any transaction. As a result, there is a great deal of information in the Memo that is not really needed in order to make an informed decision, and not enough (or none!) of the memo is devoted to key drivers in the transaction.

Clearly, the ability to prepare a complete and concise Credit Approval Memo is in part a function of training and experience at the Credit Officer level. Senior Management, however must encourage their officers to write more concise Credit Approval Memos in order to increase effectiveness within their organizations. The benefits will be significant for the institution and the individuals who undertake this strategy.


© Copyright David W. Kellogg 2000. All rights reserved.

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