Credit risk review may be referred to as loan review, credit review, asset quality review, or another name as chosen by an institution.

Promptly identifies loans with actual and potential credit weaknesses so that timely action can be taken to strengthen credit quality and minimize losses. Commenters stated that doing so could lead to duplicative functions and compliance burden for small banks and credit unions, which have limited staffing. The Public Inspection page

Commenters requested that the agencies specifically tailor the guidance to emphasize flexibility based on an institution's risk profile or even exempt small institutions from the guidance.

Therefore, no information collection request will be submitted to the OMB for review. As part of its independent risk rating validation process, credit risk review may identify loans with significant weaknesses and identifiable losses and adjust the risk rating accordingly. While a larger institution may establish a separate department staffed with credit review specialists, cost and volume considerations may not justify such a system in a smaller institution.

07/21/2022, 249

To clarify this flexibility, the proposed guidance was revised to state that effective communication typically involves providing results of the credit risk reviews to the board of directors or appropriate board committee quarterly.

The March 2003 Interagency Statement on the Internal Audit Function and Its Outsourcing (2003 policy statement)[10]

For credit unions, refer to NCUA letters to credit unions 01-CU-20 Due Diligence over Third Party Service Providers, issued November 2001 and 07-CU-13 Evaluating Third Party Relationships, issued December 2007. This final guidance emphasizes that an effective scope is risk-based and includes loans or portfolios that have high-risk indicators, exceptions to policy, are experiencing rapid growth, or have other risk attributes.

The level of experience and expertise for all personnel involved in the credit risk review process is expected to be commensurate with the nature of the risk and complexity of the portfolios. This reporting structure allows the credit risk review function to provide the board of directors with an independent assessment of the overall quality of loan portfolios and other areas of credit exposure as mandated. The final guidance is not prescriptive and allows for institutions to set their own parameters for determining the materiality of policy exceptions that Start Printed Page 33281should fall into the scope of a credit review. Outsourcing of the credit risk review function to the institution's external auditor may raise additional independence considerations.[12]. documents in the last year, 22

discusses the coordination of the internal audit function with risk monitoring functions, such as the credit risk review function. 12. However, NCUA does support the use of these classifications, as defined by the other banking agencies, as an effective method for rating adversely classified loan risk.

That footnote states that small or rural institutions with few resources may use qualified members of the staff, including loan officers, other officers, or directors, who are not involved with originating or approving the specific credits being assessed and whose compensation is not influenced by the assigned risk ratings in the credit risk review process. 17. documents in the last year, 264 An effective credit risk rating framework includes the following attributes: An effective credit risk review system starts with a written credit risk review policy[10] Commenters indicated that institutions should receive credit during a review if back testing of initial loan risk ratings shows a high level of accuracy.

It also would adjust terminology to be consistent with the current expected credit losses (CECL) methodology, a recent accounting standards change.

Further, some commenters expressed the view that smaller banks and credit unions may have difficulty in identifying concentrations of credit risk and other loans affected by common repayment factors. 5.

This guidance is relevant to all institutions supervised by the agencies and replaces Attachment 1 of the 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. Such banks and savings associations should maintain documentation that translates their risk ratings into the regulatory classification framework used by the Federal banking agencies. and describes a broad set of practices that can be used either within a dedicated unit or across multiple units throughout an institution to form a credit risk review system that is consistent with safe and sound lending practices.

Commenters should refer to the Interagency Policy Statement on Allowances for Credit Losses[17]

See 12 CFR part 30, appendix A (OCC); 12 CFR part 208, appendix D-1 (Board); and 12 CFR part 364, appendix A (FDIC).

Commenters also suggested that there may be major exceptions to policy with strong mitigating factors that suggest these exceptions may not warrant a focus in the review process.

The institution's board of directors, or a committee thereof, may outsource the credit risk review function to an independent third party.

establishing the XML-based Federal Register as an ACFR-sanctioned An effective workout plan is typically designed to rehabilitate a troubled credit or to maximize the amount of repayment ultimately collected and is therefore a loss mitigation strategy.

Typically, the lower credit quality classification or risk rating assigned by credit risk review prevails unless there is additional information that would support a higher credit quality classification or risk rating.

This guidance is an appropriate reference to assist in establishing a credit risk review function for both credit union and other institutions' loan portfolios. The commenter stated that the use of manual review of individual loans to assign and validate risk ratings would be impractical for a large portfolio of smaller retail loans.

Small or rural institutions that have few resources or employees may adopt modified credit risk review procedures and methods to achieve a proper degree of independence. documents in the last year, by the Consumer Product Safety Commission

See the Commercial and Member Business Loans section of the NCUA Examiner's Guide (Commercial and Member Business Loans > Commercial Loan Administration>Independent Loan Review). Dated at Washington, DC, on or about May 7, 2020. For example, in the review process, smaller institutions may use an independent committee of outside directors or qualified members of the staff, including loan officers, other officers, or directors, who are not involved with originating or approving the specific credits being assessed and whose compensation is not influenced by the assigned risk ratings. The comments, and any revisions to the final guidance, are discussed below and grouped based on the three questions posed in the proposal and other related topics raised by commenters.

The Public Inspection page may also

the Federal Register.

See SR Letter 03-5, OCC Bulletin 2003-12, FDIC Financial Institution Letter FIL-21-2003.

A credit risk review unit, or individuals serving in that role, can rely on information provided by other units in developing its own independent assessment of credit risk in loan portfolios, but the credit risk review unit critically evaluates such information to maintain its own view, as opposed to relying exclusively on such information. An effective framework also provides important information on the collectibility of each portfolio for use in the determination of an appropriate ACL or ALLL, as applicable. A number of commenters expressed concern with what they viewed as the one-size-fits-all approach of the proposed guidance and the potential burden to smaller institutions.

Small, Senior Examination Specialist, Risk Management Policy, gsmall@fdic.gov (917) 320-2750, Risk Management Supervision; Ann M. Adams, Senior Examination Specialist, Risk Management Policy, annadams@fdic.gov (347) 751-2469, Risk Management Supervision; or Andrew B. Williams II, Counsel, andwilliams@fdic.gov; (202) 898-3591), Supervision and Legislation Branch, Legal Division, Federal Deposit Insurance Corporation; 550 17th Street NW, Washington, DC 20429.

14. In particular, the final guidance addresses risk rating differences between the credit risk review and areas responsible for loan approval. The proposed guidance was designed so that institutions may apply its principles to the review of all loans and portfolios, including retail loan portfolios.

Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. Commenters suggested that the agencies should instead refer to evaluating the reasonableness of assumptions, such as borrower cash flow forecasts. insured depository institutions should establish and maintain a system that is commensurate with the institution's size and the nature and scope of its operations to identify problem assets and prevent deterioration in those assets, which includes considering the size and potential risks of material asset concentrations.

Commenters noted that the proposed guidance reflected sound practices and principles, incorporated the core elements of credit risk review, and did not represent a fundamental shift from Attachment 1. Discussion of Comments on the Proposed Guidance, 5. In performing its assessment of reasonableness, credit risk review can leverage work performed in this area by other functions, such as internal audit.

A risk rating review that is independent of the lending function and approval process can provide a more objective assessment of credit quality.[6]. Several commenters raised questions about the frequency of credit risk reviews and requested clarification as to when it is appropriate for reviews to be conducted less frequently than annually.

For complete information about, and access to, our official publications

In response, the final guidance has been revised to provide that such loans, and segments of portfolios, selected for review are generally reviewed for the reasonableness of assumptions.

The footnote also states that institution management and the board, or board committee, should have reasonable confidence that the personnel chosen will be able to conduct reviews with the needed independence despite their position within the loan function.

In any case, institution personnel who are independent from the lending function typically assess risks, develop the credit risk review plan, and verify appropriate follow-up of findings.

9. The final guidance replaces Attachment 1 as the agencies' guidance on credit risk review systems for all supervised institutions and is being issued as a standalone document. Another commenter requested that the agencies clarify the proposed guidance's applicability to large banks, including defining a large institution based on asset size and examples of complex institutions and explaining how supervisors make these determinations.

Provides management and the board of directors with an objective, independent, and timely assessment of the overall quality of the loan portfolio. to the courts under 44 U.S.C. Some commenters cautioned the agencies against incorporating FASB ASC Topic 326 into the credit review final guidance because this would create a complex methodology that many institutions would be unable to implement.

The final guidance is available on June 1, 2020.

electronic version on GPOs govinfo.gov.

documents in the last year, 75 Evaluation of the effectiveness of approved workout plans. One commenter stated that one part of the proposed guidance allows institutions to have a system concept for structuring credit risk review whereas the latter part of the proposed guidance defined specific roles for a credit review function.

headings within the legal text of Federal Register documents.

has no substantive legal effect. Some commenters indicated the guidance was too prescriptive; in one case, a commenter considered the guidance excessively detailed and not aligned with current practices for credit unions in particular.

Accordingly, the agencies have clarified in the final guidance that effective credit risk reviews are typically performed annually.

Some commenters called for the guidance to better delineate between the responsibilities of credit risk review and other functions. (The NCUA was not an issuing agency of the 2003 policy statement.). The OCC, the Board, the FDIC, and the NCUA (collectively, the agencies) are issuing final guidance for credit risk review (final guidance). 9.

In particular, institutions with large and complex loan portfolios typically maintain records of their historical loss experience for credits in each of the categories in their risk rating framework.

Interagency Guidance on Credit Risk Review Systems, 84 FR 55679 (Oct. 17, 2019).

12 CFR part 30, appendix A (OCC); 12 CFR part 208, appendix D-1 (Board); and 12 CFR part 364, appendix A (FDIC).

Information about this document as published in the Federal Register.

However, an effective internal audit function maintains the ability to independently audit the credit risk review function. and services, go to

An effective credit risk review system provides for review and evaluation of an institution's significant loans, loan products, or groups of loans typically annually, on renewal, or more frequently when internal or external factors indicate a potential for deteriorating credit quality or the existence of one or more other risk factors.

As the final guidance notes, doing so is appropriate when more robust procedures and methods are impractical. One commenter suggested that the proposed guidance would benefit from additional discussion and analysis of how modest-sized institutions with limited personnel would implement the guidance. Risk rating responsibility and adjudication, INTERAGENCY GUIDANCE ON CREDIT RISK REVIEW SYSTEMS, Credit Risk Rating (or Grading) Framework, Elements of an Effective Credit Risk Review System, Qualifications of Credit Risk Review Personnel, Independence of Credit Risk Review Personnel, Depth of Transaction or Portfolio Reviews, Communication and Distribution of Results, https://www.federalregister.gov/d/2020-10292, MODS: Government Publishing Office metadata.

The OCC, Board, and FDIC believe that the qualifications of audit personnel are sufficiently addressed in the 2003 policy statement, which is referenced in the final guidance.

documents in the last year, 1445 Some commenters raised concerns including that the guidance was too prescriptive. The commenter believed that this responsibility primarily lies with the credit administration function while credit risk review would identify such loans using a sample-based approach.

The credit risk review function can also provide useful continual feedback on the effectiveness of the lending process in order to identify any emerging problems. One commenter stated the proposed guidance could impose higher costs on smaller institutions because such costs cannot be spread across a large asset base and requested the guidance provide more flexibility for review activities. Evaluates the activities of lending personnel and management, including compliance with lending policies and the quality of their loan approval, monitoring, and risk assessment.

Institutions supervised by the FDIC should refer to FIL 22-2017, Adoption of Supervisory Guidance on Model Risk Management, including the statement of applicability in the FIL.

regulatory information on FederalRegister.gov with the objective of

About the Federal Register The agencies' three questions asked whether the proposed guidance reflected sound practices, whether the proposed guidance was appropriate for institutions of differing sizes, and whether the agencies should include additional factors in the proposed guidance to help credit risk review achieve a sufficient degree of independence.[5]. Whether or not the institution has a dedicated credit risk review department, it is prudent for the credit risk review function to report directly to the institution's board of directors or a committee thereof, consistent with safety and soundness standards.

that is reviewed and typically approved at least annually by the institution's board of directors or appropriate board committee to evidence its support of, and commitment to, maintaining an effective system.

The institution's board of directors or appropriate board committee typically approves the scope of the credit risk review on an annual basis or whenever significant interim changes are made in order to adequately assess the quality of the current portfolio.

Also see 12 CFR part 723 (NCUA).

14.

By order of the Board of Governors of the Federal Reserve System.

Placing primary responsibility on loan officers, risk officers, and line staff is important for continuous portfolio analysis and prompt identification and reporting of problem loans.

Risk rating guidance for credit unions is set forth in NCUA letters to credit unions 10-CU-02, Current Risks in Business Lending and Sound Risk Management Practices, issued January 2010 and 10-CU-03, Concentration Risk, issued March 2010.

A method for communicating direct, periodic, and timely information to the institution's senior management and the board of directors or appropriate board committee on the status of loans identified as warranting special attention or adverse classification, and the actions taken by management to strengthen the credit quality of those loans.

Most commenters expressed general support for the guidance.

However, as discussed in the agencies' March 2003 Interagency Policy Statement on the Internal Audit Function and its Outsourcing (2003 policy statement), some institutions coordinate the internal audit function with several risk monitoring functions, such as the credit risk review function. developer tools pages. Attachment 1 supplemented and aligned with other relevant agency issuances on credit review, including the Interagency Guidelines Establishing Standards for Safety and Soundness.[2]. Commenters suggested that the agencies consider the nature of a loan portfolio and the history and experience of an institution's management team when determining the scope of credit risk review.

Several commenters observed that the proposed guidance provided an opportunity to establish which area or department at the institution will have responsibility over risk rating dispositions within the credit review function. Commenters stated that the phrase common repayment factors could lead to a much larger scope of review.

Institutions can select their own high-risk indicators, keeping in mind how the indicators fit the characteristics of the overall portfolio and how the indicators help to reinforce safe and sound practices. Provides management with accurate and timely credit quality information for financial and regulatory reporting purposes, including the determination of an appropriate ACL or ALLL, as applicable.

An effective scope of credit risk review is risk-based and typically includes: Loans and portfolio segments selected for review are typically evaluated for: When applicable, this evaluation includes the appropriateness of automated underwriting and credit scoring, including prudent use of overrides, as well as the effectiveness of account management strategies, collections, and portfolio management activities in managing credit risk; An important activity of an effective credit risk review system is the discussion of the review findings, including all noted deficiencies, identified weaknesses, and any existing or planned corrective actions (including time frames for correction) with appropriate loan officers, department managers, and senior management.

An effective credit risk review function also considers industry standards for credit risk review coverage consistent with the Start Printed Page 33287institution's size, complexity, loan types, risk profile, and risk management practices and helps to verify whether the review scope is appropriate. The agencies received a number of comments regarding the differences in characteristics between retail (consumer) and commercial loan portfolios, as well as the processes, techniques, tools, data and technology used to conduct credit risk review of retail loan portfolios.

The agencies are adopting the proposed guidance in final form (final guidance), with certain revisions as discussed below.

The NCUA Examiner's Guide will be updated to reflect this new guidance. The guidance does not singularly assign the process of risk identification to credit risk review; effective ongoing credit administration practices allow other credit risk functions to have a role in the prompt detection of changes in loan quality and appropriate adjustments to the risk rating.

The reference to common repayment factors is meant to provide flexibility to institutions to consider a variety of factors that are applicable to the institution's circumstances and which may lead to a concentration of credit risk.

edition of the Federal Register. by the Committee for Purchase From People Who Are Blind or Severely Disabled One commenter disagreed that a primary objective of credit risk review was to promptly identify all loans with actual and potential credit weaknesses. An effective credit risk review system provides for informing the board of directors or appropriate board committee more frequently than quarterly when material adverse trends are noted.

The documents posted on this site are XML renditions of published Federal Additionally, the final guidance includes language in a new sub-bullet under Depth of Transaction Reviews. The sub-bullet indicates that, with regard to evaluating credit quality, Start Printed Page 33283soundness of underwriting and risk identification, borrower performance, and adequacy of the sources of repayment, [w]hen applicable, this evaluation includes the appropriateness of automated underwriting and credit scoring, including prudent use of overrides, as well as the effectiveness of account management strategies, collections, and portfolio management activities in managing credit risk..

The President of the United States communicates information on holidays, commemorations, special observances, trade, and policy through Proclamations.

Board: Constance Horsley, Deputy Associate Director, (202) 452-5239; Kathryn Ballintine, Manager, (202) 452-2555; or Carmen Holly, Lead Financial Institution Policy Analyst (202) 973-6122; or Alyssa O'Connor, Attorney, Legal Division, (202) 452-3886, Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.

Each document posted on the site includes a link to the This site displays a prototype of a Web 2.0 version of the daily

documents in the last year, 53

Until the ACFR grants it official status, the XML The agencies collectively received 19 comments on the proposed guidance. the current document as it appeared on Public Inspection on

Another commenter noted that the boards of directors of small, closely held institutions may be involved in the credit process from the beginning, and the board's input and participation in loan origination can be more important Start Printed Page 33284than the subsequent credit review that happens post origination.

Footnote 6 states that small or rural institutions that have few resources or employees may adopt modified credit risk review procedures and methods to achieve a proper degree of independence. Use the PDF linked in the document sidebar for the official electronic format. Senior management may be responsible for appropriate administrative functions, provided such an arrangement does not compromise the independence of the credit risk review function.