We are trying to establish policy limits for loan exceptions (term, guarantor, etc.) and was wondering if anyone would mind sharing what their limits might be. We are wanting to set a limit as a percentage of loans and as a percentage of capital. I realize limits are affected by the risk appetite of the bank. Thanks in advance.

You might get better feedback if you provide a little information about your bank. Asset size, loan portfolio size and make up of the loan portfolio.

We are a commercial bank, approximately $550 million in assets, 60% of our portfolio is commercial (C&I, real estate, construction) and 40% is consumer (residential mortgages). We are starting to track loans originated with policy exceptions and want to set a limit as to the number of exceptions. Ideally, we want zero policy exceptions, but every bank has loans made outside policy. I am curious if other bankers have limits on exceptions and if so, is it based on a percentage of loans outstanding or capital?

When you say set a limit as to the number of exceptions, please explain. Are these by loan type, by officer, or other criteria.

We are looking at exceptions at the portfolio level. For example, we prefer to have a guarantor, but we allow the borrower to not guarantee the loan under certain circumstances. We code the loan with a guarantor exception code. We count exceptions by dollar amount. For now we aggregate the dollar amount of all exceptions, whether it is a guarantor, term or other type of exception, and divide by the total loan portfolio. We also take the total dollar amount of exceptions and divide by total risk based capital. We want to set a limit for both ratios. I was wondering if anyone else has set such limits.

How do such limits protect you from fair lending issues?

I don't think the limits protect us from fair lending issues. They may invite increased scrutiny for fair lending. We are looking at this from a underwriting risk/safety and soundness perspective.