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Dick Elliot, EVP/Loan Review

How do you risk rate a loan where the loan is “paying as agreed” but you don’t have current financial statements from the Borrower? How about when the primary source of repayment does not show ability to repay the loan but you know the Guarantor(s) have substantial liquid assets and are keeping the payments current? How do you support these risk ratings? We often run into these situations when completing loan reviews.

TGA assigns the following risk ratings when evaluating credits lacking current financial statements:

  • Pass/Watch: Paying as agreed and acceptable LTV.
  • Special Mention: Borrower was delinquent (or has a history of delinquency) and/or secondary support is weak (LTV over regulatory recommended levels).

Regulatory rules also allow a loan to be risk rated as Pass when the primary source of repayment does not show adequate debt service coverage but the Guarantor(s) show both:

  • The ability to service the debt, and
  • Have demonstrated the willingness to support the loans.

Ability must be validated by current financial statements (i.e., tax returns and personal financial statement) and the willingness must be demonstrated by keeping the payments current.

Having said that, these circumstances must be taken into consideration with all the other variables (i.e., the 5 C’s) before determining the overall risk rating. For example, loans may be paying as agreed but the Borrower may be in an industry (Conditions) that has been significantly impacted by the current economic environment. Or the owners are highly leveraged (Capital) with minimal or negative equity. You should take all this into consideration before assigning the final risk rating. No easy task to say the least.

Over the years, we have developed an excellent model to use when assigning risk ratings, which includes a thorough evaluation of each of the 5 C’s plus Credit Administration. These variables come into play differently for each loan. Finally, how you come up with the risk rating must be transparent to a third party, such as examiners, and you must be consistent in applying the risk ratings. Contact us for more information to see how we have perfected this technique.


ABOUT US: T. Gschwender & Associates, Inc. is a diversified consulting company that has been providing services to financial institutions since 1984. Our clients include small community banks and credit unions with less than $100 million in assets to much larger regional institutions with over $5 billion in assets. We like to describe ourselves as a highly sophisticated "Credit Department," able to handle all functions from initial borrower due diligence to collateral liquidation, and everything in between. Our goal is to provide these services in a timely and cost effective manner, allowing our clients to tap into resources they would not otherwise be able to employ internally.