Proactive Vs. Reactive Exception Management

When an institution makes a loan, it is always necessary to monitor specific requirements both before the loan is made and after the loan is booked. Exception management starts as soon as a loan request is received and continues through to payoff. Each loan made has policy, compliance or collateral requirements that must be met at different times throughout the life of a loan. The process of monitoring loan requirements can be daunting and can become burdensome to a financial institution to the point it can lead to customer dissatisfaction and ultimately to potential risk. Financial institutions certainly realize that exception management is a necessary part of doing business but they are challenged by the costs and the expertise of efficiently administering exceptions.

The way in which an institution integrates these requirements into its workflow processes, and the way it follows up on exceptions, determines whether it is using proactive or reactive exception management.

Reactive Exception Management

Every time you have a loan request, think about all the information required from either your borrower, outside vendors, loan policy and compliance to support the loan request. From financial statements, tax returns and entity document to collateral documentation, somehow someone needs to be able to remember what and when specific documents are required. Back in the day (and still today, for some institutions) paper checklists were used to not only let users know what was required but also track when a document or requirements was asked for but when it was received or completed. However, these paper checklists were not necessarily utilized by everyone who touched the loan request or they had their own separate checklist and these checklists were not shared which lead to some duplication of effort or items may be missed entirely.

Any individual within the credit workflow who touched the loan request may not have do a checklist. Lenders asked for the last 3 years financials but forgot to tell anyone else so there is no documentation of when the request was made and when the documents were received. If entity documentation is asked for, the loan assistant may mark down the date requested but when does follow-up happen if needed but not received. With a manual system, it just doesn’t work well for anyone involved with gathering required information or following up on reoccurring documentation. Even with an Excel spreadsheet for tracking, how do you integrate the Lender’s spreadsheet with the Credit department’s spreadsheet or the Loan Operations worksheet. There are too many ways for exception and requirement tracking to fall through the cracks and put the bank at potential risk if required documentation is not received in a timely manner.

Proactive Exception Management

Proactive exception management is simple. It is a systematized, automated, thoughtful and transparent process of managing exceptions. You will still go through many of the same workflow steps you do today but by automating the exception management process, it will eliminate the headaches and risks of a manual process.

Technology is necessary to support a proactive exception management process and can immediately provide users with an understanding of a borrower’s specific exceptions and other requirements are. It will allow users to see the status of exceptions or requirements and rather than waiting for outdated paper reports, technology will provide real-time, on-screen views and custom reports. Each exception can be updated immediately at the time it is touched and every user will be able to see the real-time updates as they happen in the system. Aging reports, Lender reports, specific tracking items reports and many other types of standard or custom reports should be available not only on paper but real time/on-screen reports are be available to users. By automating your exception tracking processes, you will begin to see increased efficiencies throughout your lending process and risk minimized by having data available to users and management.

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