On-going Credit Management: Document, Document and Document By: Daniel R. McDonald Date: 2/4/10 On-going credit management and the ability to collect on loans can be enhanced through accurate and complete documentation as well as improved customer relationships. There are several key areas to focus on regarding customer relationships.   Obtain updated financial information and tax returns (including all K-1s for business interests) annually. Customer files should routinely show that the information has been reviewed and/or analyzed.  In order to determine that the borrower(s) has the on-going capacity to service the outstanding debt, the file should contain an updated analysis showing available cash flow, outstanding debt obligations and the computation for debt service coverage ratio (DSCR) and net debt ratios.   Many of the borrowers provide personal financial statements showing substantial liquid assets, which were partially used to approve the credit facility; however, the files routinely do not include verification of the liquidity (brokerage statements, bank statements, etc.). To further support the borrower’s financial capacity, banks should obtain verification of liquid assets via bank or brokerage statements annually.   Lenders should place greater emphasis on problem relationships.  Incorporating the use of officer comments describing the status of loans that are classified or are dynamic in nature is a must, in order to document the file at least quarterly (or monthly, if necessary). Bank management should reinforce this practice with the loan officers and the importance of maintaining updated write-ups for problem credits on a regular basis to include action plans, performance benchmarks and trigger dates.  Contained within this action plan there should also be a section for all collateral documents to be reviewed and verified to ensure the bank’s collateral position is protected. To avoid surprises, this verification should include a search and validation of all public records. While implementing these practices may not ultimately reduce the overall risk of loss, it is a proactive approach that measures and identifies potential weaknesses, as well as puts performance and time-sensitive deadlines in place for managing through loan portfolio problems.