Inadequate loan documentation is the No. 1 reason for commercial loan losses, says Dana Sumner, president/CEO, Development Finance Training and Consulting.

During the CUNA Commercial Loans During Turbulent Times E-school, he offered a nine-step process for reviewing problem commercial loans.

1. Loan documentation review

Loan modifications give credit unions the opportunity to review and correct inefficiencies in documentation, Sumner says.

He notes that NCUA is urging credit unions to implement performance covenants in their loan agreements.

2. Lien search/collateral evaluation

This includes Uniform Commercial Code search and title updates, determination of lien priority, and tax status.

Collateral valuation is a major issue during times of economic uncertainty, Sumner says.

3. Financial analysis

The onset of the coronavirus (COVID-19) has made it difficult to collect accurate and complete financial information for many businesses, Sumner says.

“And not only do we need timely information, we need the expertise to look at the right areas of the business to understand if it’s performing well,” he says. “Looking at an agricultural loan is different than looking at an industrial project.”

4. Related debt search

NCUA wants credit unions to have a global understanding of their business members’ commercial interests, he says.

“If your member has multiple entities, that can affect the transaction in front of you,” Sumner says.

5. Financial issue evaluation

Issues could include stale inventory, significant changes in balance sheet composition, decreasing sales, or the loss of major clients, Sumner says.

6. Operational problem evaluation

This includes everything from accounting systems to inventory to business planning.

Even economic factors such as the price of gas have operational implications for many businesses, Sumner notes.

 “Your members have to understand how their businesses are affected by these issues,” he says.

7. Competitive environment evaluation

CUNA Commercial Loans During Turbulent Times E-school

Credit unions should determine the business members’ competitive prospects for the next six months.

“This takes a proactive approach,” he says. “Ask members the right questions about their businesses.”

8. Survivability analysis

Government guarantee programs are an option for many credit unions and business members.

“Most of these programs don’t have an emphasis on collateral at a time when there’s potential for collateral weakness,” Sumner says.

9. Initial recommendations

Provide recommendations for member businesses that follow your credit union’s strategy, he says.

“Is there a credit philosophy that’s ingrained in your credit union from the CEO down?” Sumner asks. “You want to maximize recoveries and minimize potential losses, and ensure the strength of the credit union and the membership.”