Loan operations
What is annual loan review?
Annual loan review is the yearly reassessment of a commercial credit relationship to confirm repayment capacity, covenant compliance and the accuracy of its risk rating.
The term annual loan review is used in two related ways. First, it describes the yearly review a lender performs on each commercial relationship above a set size, updating financial spreads, cash flow analysis, collateral values, guarantor support and covenant compliance, then confirming or changing the risk rating. Second, it can refer to the independent credit risk review function that examines samples of loans to test underwriting and rating accuracy.
Both forms help an institution catch deterioration between origination and maturity. Regulatory guidance, including the 2020 Interagency Guidance on Credit Risk Review Systems, expects institutions to maintain an independent review function whose scope, frequency and reporting are appropriate to their size and risk. Findings are reported to management and the board.
Common problems include reviews completed late or without current financial statements, reviews that restate prior analysis rather than reassessing risk, and reviewers who lack independence from lending. When reviews pile up, analysts may focus on completion rather than substance. Ratings that independent loan review frequently changes indicate weaknesses in the original rating process.
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