1 Types of Commercial Bank Loans Real estate loans secured by real property include short term loans for construction and land development and longer term loans to finance the purchase of farmland homes apartments commercial structures and foreign properties Financial Institution Loans credit to banks insurance companies finance companies and other financial institutions Agricultural loans extended to farms ranches to assist in planting and harvesting crops and supporting the feeding and caring of livestock Commercial and industrial loans granted to businesses to cover purchasing inventories paying taxes and meeting payrolls Loans to individuals include credit to finance the purchase of automobiles mobile homes appliances and other retails goods to repair homes cover costs of medical care and other personal expenses and are either extended directly to individuals or indirectly through retail dealers Miscellaneous loans include all loans not listed above including securities loans Lease financing receivables where the lender buys equipment or vehicles and leases them to its customers o Of all these loans the largest in dollar volume is real estate loans accounting for more than half of total bank loans in US followed by loans to individuals and then commercial and industrial each represent about 1 5th of total loans One of the most important ways a lending institution can make sure loans meet regulatory standards is to establish a written loan policy communicates to employees what procedures they must follow and helps the lender move toward a portfolio that can successfully blend multiple objectives the most important elements of a well written policy are o A goal statements for the entire loan portfolio o Specification of the lending authority given to each loan officer and loan committee o Lines of responsibility in making assignments and reporting info o Operating procedures for soliciting evaluating and making decisions on customer loan applications o Required documentation o Details concerning who is responsible for maintaining and reviewing credit files o Guidelines for taking and evaluating loan collateral o Procedures for setting loan rates o Statement of quality standards Banks legal lending limit an unsecured loan to a single customer may not exceed 15 of a single national bank s unimpaired capital and surplus account 2 Bank Regulators loan criteria for bank Sarbanes Oxley Act of 2002 requires that loans to insiders be priced at market value rather than being subsidized by the lending institution The community reinvestment act 1977 requires selected lenders to make an affirmative effort to meet the credit needs of individuals and businesses in their trade territories so that no areas of the local community are discriminated against Equal Credit opportunity act no individual denied credit because of race sex religions etc International lending US law in the form of International Lending and Supervision Act requires US banks to make public any credit exposures to a single country that exceed 15 of their primary capital or 0 75 of their total assets whichever is smaller Under the Uniform Financial Institutions Rating System used by federal examiners each bank firm is assigned a numerical rating based on the quality of asset portfolio o 1 strong performance o 2 satisfactory performance o 3 fair performance o 4 marginal performance o 5 unsatisfactory performance the better the rating the less frequently it will be subject to examinations criticized loans loans that are performing well but have minor weaknesses because the lender has not followed its own loan policy or has failed to get full documentation from the borrower scheduled loans loans that appear to contain significant weaknesses or that represent what the examiner regards as a dangerous concentration of credit in on borrower or one industry adversely classified loans that carry immediate risk of not paying out as planned 3 groupings o substandard loans loans margin of protection is inadequate due to weaknesses in collateral or in the borrower s repayment abilities o doubtful loans carry a strong probability of an uncollectible loss o loss loans regulated as uncollectible and not suitable to be called to the lending institution bankable assets 3 CAMELS rating all six dimensions of lender performance are combined into one overall numerical rating Capital adequacy Asset quality Management quality Earnings record Liquidity position Sensitivity to market risk o Depository institutions whose overall CAMELS rating is toward the low riskier end of the numerical scale overall rating of 4 or 5 tend to be examined more frequently than the highest rated institutions whose ratings are 1 2 or 3 o Examination process today rapidly changing technology and the emergence of very large financial institutions appear to have weakened the effectiveness of traditional examination procedures 4 6 C s of credit is the borrower creditworthy Deals with whether or not the customer can service the loan that is pay out the credit when due with a comfortable margin for error looks at 6 critical aspects of a loan application Character responsibility truthfulness serious purpose and serious intention to repay all monies owed o Customer s past payment record experience of other lenders with this customer credit rating presence of cosigners or guarantors of the proposed loan Capacity loan officer must be sure the customer has the authority to request the loan and the legal standing to sign a binding loan agreement o Identity of customer and guarantors Cash does the borrower have the ability to generate enough cash in the form of cash flow to repay the loan o Recent trends in sales revenue level and changes in Cost of goods sold trends in S A expenses level of expenses and taxes Collateral does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the loan o Vulnerability of assets to obsolescence liquidation value of assets Conditions how changing economic conditions may affect the loan to assess industry and economic conditions most lenders maintain files of information on the industries represented by their major borrowing customers o Customer s current position in industry and expected market share sensitivity to business cycles and changes in technology labor market conditions impact of inflation on balance sheet long run industry or job outlook Control whether changes in low and regulation could