Lending Policy Exceptions

We are trying to update our current lending policy to include some guidelines for granting exceptions to our underwriting policy. This was suggested during a recent audit. Does anyone have suggestions or a sample to share?

We had this same recommendation from our examiners and my response was- Anything outside of our lending policy is an exception, that is our guideline. They agreed.

They may be looking for an acknowledgement of the exception in the file and the official approval process to get the exception granted.

We have an automated workflow built in Sharepoint that exceptions flow through. I review the exceptions quarterly for any fair lending issues. I can easily print out a report at any point in time to show the exceptions. All exceptions are reported to our Board quarterly as well.

We were instructed to put something in writing within our lending policy on when and under what circumstances do we make underwriting exceptions. Looking to see what others might have come up with that is enough, without being too much.

We document, track and report to the board.....but this is specific to written guidance in our lending policy.

Exceptions should be in policy, and universally applied (not if a customer asks for it - some customers may be bad at negotiating. Also, if the exceptions were predominantly given to non-minority borrowers, regulators could insinuate that they were being offered by the loan officers selectively.)

I generally recommend creating exception codes, for both approvals and pricing. This will provide management with valuable analysis tools – being able to identify the number and types of exceptions, and monitor the portfolio to see if the exceptions were ultimately advantageous or a detriment. These exceptions should also be recorded and tracked by the departments, analyzed and reported to the Board by management. This unique identification of loans with exceptions simplifies retrieving for monitoring purposes, analysis and reporting.

Tracking and managing exceptions can also identify those areas where policies may need to be revisited. If a substantial portion of loans have similar exceptions, management may wish to validate the necessity of the policy, term or procedure. In a credit scoring system, revalidation is one of its most important controls. Similarly, revalidating a policy or procedure where exceptions were used to override the policy would give management a better perspective of how the policy fits into the overall goals of the bank.

"on when and under what circumstances do we make underwriting exceptions" Really only your bank can do that. Documenting what you do and when you are willing to do it, is really a very bank specific issue. If you actually document the specific exceptions allowed, are they then really exceptions? You need to keep it rather generic. Pricing exceptions will be made when the customer brings documented proof of a sold credit offer by a competitor at a lower price or different terms. Underwriting exceptions may be made with appropriate approval for things such as compensating balances or other documented mitigating factors.

Thanks all. I agree it should be somewhat generic, rather than too specific, Also that the "when and under what circumstance" is really particular to the institution. I appreciate the feedback and will move forward keeping this in mind.

Our policy says that the next approval authority up must provide approval for exceptions not deemed immaterial. Senior staff are authorized to determine whether it is immaterial. It also says we will monitor.

One caveat on exceptions. The file where an exception was granted may be compared against an application that was denied, or a loan that was offered at a different rate or term.

Make sure that the exception is allowed by policy, and documented WHY it was given. Looking harshly at exceptions, prove/document that the lender did not discriminate by not giving the same exception to another similarly situated applicant/borrower.