What Is a Loan Committee?
A loan committee is the lending or management committee of a bank or other lending institution. It generally consists of upper-level officers with management authority. The loan committee analyzes and subsequently approves or rejects any loan that the initial loan officer does not have the authority to approve. The committee ensures that the loan meets the institution’s standard lending policy. If it does, the committee can agree to fund and disburse the loan with a binding commitment.
How a Loan Committee Works
A loan committee is usually responsible for regular credit reviews of the bank’s maturing loans, which are the ones whose terms are nearing completion. For example, a 10-year loan in its ninth year would be a maturing loan. At times a bank may extend the original credit facility. However, the loan committee must ensure that this is done in accordance with proper procedure. For the bank, it is important to make sure that the borrower’s creditworthiness has not deteriorated.
To determine the creditworthiness of a borrower, a loan committee will conduct a valuation that includes factors such as the borrower’s past repayment history and credit score, along with the amount of available assets and liabilities on the individual’s balance sheet.
[Important: A loan committee analyzes and subsequently approves or rejects any loan that the initial loan officer does not have the authority to approve.]
Three major agencies in the United States (Experian, Transunion and Equifax) report, update and store consumers’ credit histories, which loan committees incorporate into their decision to extend credit to a borrower. The five main factors that these agencies use when calculating a credit score are payment history, total amount owed, length of credit history, types of credit and new credit.
A loan committee also determines which collection action should be taken on past-due loans. Depending on the policy of the lending institution, once a borrower has missed his or her due date, the committee can either immediately charge a late fee or allow the borrower to enter a grace period. To bring the account up to good standing, the borrower must make the required minimum payments, including any late fees. Individuals or businesses that are 30 days behind schedule on loan payment will usually find that the delinquent account has affected their credit report.
Finally, a loan committee will also be charged with making sure that the bank is compliant with all regulations. This can include not only lending procedures but also bankruptcy and receivership issues and even extend to reviewing marketing materials.