Credit Memos: Are You Utilizing Them to Their Full Potential?
Credit Memos: Is Your Credit Union Utilizing Them to Their Full Potential?

Credit Memos: Is Your Credit Union Utilizing Them to Their Full Potential?

The purpose of the credit analysis memorandum (CAM) and loan narrative is to capture an accurate, complete snapshot of the applicant and credit request. These critical documents are the basis for making the initial credit decision and create a foundation for modifications and renewal decisions as the loan ages. Compliance expert, Molly Stull, details what to include in your credit memos and loan narratives. Below we will cover some basic functions that a credit memo should include, as outlined by Molly.

Credit narratives have more than one function in the lending arena.
  1. They serve as the basis for making credit approval and renewal decisions.
  2. They are used for detailing ongoing account management for commercial loan relationships and maintaining pertinent file information as to material developments or changes in the quality or nature of the credit or borrower over the life of the loan.
  3. They are also critical to documenting workout strategies for problem credits, detailing key aspects of collectability, and collateral administration.

A well-written credit memo assists:
  1. Loan officers and underwriters in making a strong credit decision (now and in the future for possible renewals).
  2. Directors on the loan committee to make a strong credit decision.
  3. Loan Review Officers in understanding a credit being reviewed.
  4. In documenting workout strategies for problem credits.
  5. Examiners when reviewing your file.

One size does not fit all! There will be varying degrees of detail based on the complexity and risk involved. Certain aspects of the write-up will be consistent and generally contain the same basic information. However, the depth of analysis for the purchase of a piece of used logging equipment would be very different from that needed for financing a large land development project. 

Write-ups will also be more robust for new borrowers unknown to the lender than they would for borrowers that are well known with established borrowing relationships with your credit union.

The CAM is designed to document the financial institution’s assessment of credit risk surrounding the loan request or renewal under consideration and support the ultimate credit decision.  Every CAM should have four basic components:
  1. Term Sheet
  2. Exposure Summary
  3. Narrative Analysis
  4. Financial Spreads and other Supporting Schedules

As a credit analyst or lender, it’s up to you to tell the borrower’s story. Decision-makers need to know what they don’t know. In other words, develop the backstory and get behind the numbers. Ask questions… and then ask follow-up questions. How? Why? When? What if?

Learn More

To learn more about this timely topic, check out Molly Stull’s webinar Writing Effective Credit Memos & Loan Narratives. Use coupon code CREDITMEMO for 10% off this webinar, valid through August 2022.