Exams and audits, already handled.

The short answer

You pass a commercial loan exam by closing loans on a record that already answers the examiner's questions. Examiners sample loans and test whether each file shows sound credit analysis, proper approval, required steps in the required order, perfected liens and complete documentation, and whether the sampled files follow the same standard.

Files built that way during the closing pass with little preparation. Files rebuilt from inboxes under deadline are where findings come from, even when the loans are sound.

What do examiners check in commercial loan files?

The FDIC's Risk Management Manual lists the factors loan reviews typically analyze, and examiners test the same ground.

How do examiners test appraisals?

Examiners test both the requirement and the process. Bank-regulated commercial real estate transactions above $500,000 need an appraisal by a state certified appraiser under 12 CFR 34.43, and smaller transactions need an evaluation.

Interagency guidelines issued in 2010 call on institutions to show the independence of the process for obtaining values and to select appraisers based on competence and market knowledge. The OCC's Commercial Real Estate Lending handbook expects the loan file to include the appraisal or evaluation, the bank's review of it, the engagement letter and the appraiser's qualifications.

The file proves independence with dates and names: who engaged the appraiser, who reviewed the report and when, all before the credit decision.

Which steps have to happen in order?

• 1
  Appraisal and review before approval

  The credit decision relied on a reviewed value.
• 2
  Approval before funding

  The approval date precedes the funding date, and the terms match.
• 3
  Flood determination before closing

  The standard flood hazard determination and any required notice came before the loan closed.
• 4
  Environmental review before closing

  The Phase I or other environmental review was complete and reviewed before funding.
• 5
  Insurance in force at funding

  Conforming evidence of property, liability and required flood coverage existed on the funding date.
• 6
  Lien recording after funding

  The security instrument recorded, and the final title policy arrived and was reviewed.

Why does consistency across files matter so much?

Sampling exists to catch variance. When every file follows the same standard, a sample confirms the control. When each closer builds files their own way, a sample of a few loans exposes exceptions that examiners then assume exist elsewhere.

The OCC's Commercial Real Estate Lending handbook asks examiners whether a bank employs standardized checklists to control documentation for individual files. A standard checklist by loan type answers that question and makes every sampled file look like the others.

How do examiners review commercial real estate concentrations?

Interagency guidance on commercial real estate concentrations, summarized in the OCC's Commercial Real Estate Lending handbook, flags banks whose construction and land loans reach 100 percent of total capital, or whose non-owner-occupied commercial real estate reaches 300 percent of capital after growing 50 percent or more in 36 months.

When a bank crosses those levels, examiners look at its own portfolio analysis. The handbook lists diversification across property types, geographic dispersion, underwriting standards, presold units or take-out commitments on construction loans, and portfolio liquidity among the factors they weigh. Keep that analysis current, with loan-level data that ties to the files.

What do examiners expect on participations?

Examiners expect a participant to review the credit for itself. A purchased participation file that contains only the lead lender's credit memo shows reliance, and reliance draws comments.

Credit unions face written rules. Under 12 CFR 701.22, a credit union's participation policy must establish underwriting standards for participations and limit purchases from any one originating lender to the greater of $5,000,000 or 100 percent of its net worth unless a waiver applies. The file should show the credit union's own analysis against that policy.

How should covenant testing be documented?

Document the definition, the schedule and the result. The OCC handbook notes that when loan documents contain debt service coverage covenants, the definitions of income and expenses should be defined precisely, and that the coverage calculation for covenant compliance may differ from the ratio used in underwriting.

Record each test with the period, the inputs, the calculation, the result and the reviewer. When a test fails, file the notice, the waiver or amendment and its approval next to the test. An examiner reading the file should be able to follow the covenant from the loan agreement to the latest result without asking anyone.

Which findings recur in commercial loan exams?

• Stale financial information

  Borrower and guarantor statements or rent rolls past the collection date in the loan agreement.
• Missing or late post-closing documents

  Recorded documents and final title policies that never made it into the file.
• Covenant tests without evidence

  Covenants that exist in the loan agreement and have no record of testing.
• Appraisal review gaps

  Reviews missing, undated or dated after the approval.
• Policy exceptions without approval

  Loans outside policy limits with no documented exception approval.
• Unsupported risk ratings

  Grades left unchanged after the property's performance or the sponsor's condition changed.

How do you build exam readiness into the closing?

Load the approval conditions into the closing checklist so every condition gets a document, an owner and an acceptance record. Date the appraisal review inside the system. Keep the approval memo and the executed documents in the same record so an examiner can compare them without a search.

Keep the post-closing list open until recording, the final policy and every trailing item arrive. Move covenant tests and financial reporting onto the same record after closing, so monitoring evidence accumulates next to the documents it tests.

What should a response to an exam request look like?

Respond with complete, indexed packages. For each sampled loan, provide a short cover index listing the approval, the executed documents, the appraisal and review, the title policy, insurance evidence, post-closing items and monitoring records, with each item exported from the record.

Speed matters less than completeness. A package that arrives a day later and answers every question ends the file review. A partial package that arrives the same afternoon starts a string of follow-ups.

Why do good loans still get findings?

Findings measure evidence. A loan can perform perfectly and still draw an exception when the file cannot show that the appraisal review came first, that insurance was in force at funding or that a covenant was tested.

Reconstruction under deadline produces exactly those gaps. The people who remember what happened have moved on, email archives hold partial threads, and the evidence that exists in someone's memory counts for nothing in a file review.

What does exam-ready closing look like in practice?

TruStone Financial runs its commercial closings on Prodeal, with documents, statuses and activity kept on one record per deal, an approach that matters at NCUA examinations. The same record made closings faster. Prodeal customers close about 50% faster, and an exam that confirms the file is the second return on that work.