FDIC TE – Loans Section 3.2 (Questions With Correct
Solutions)
Lending Policy Correct Answer - should not be a static document, but
must be reviewed periodically and revised in light of changing circumstances
surrounding the borrowing needs of the institution's customers as well as
changes that may occur within the institution itself.
Loan Review System or Credit Risk Review System Correct Answer -
refer to the responsibilities assigned to various areas such as credit
underwriting, loan administration, problem loan workout, or other areas.
effective loan review system is generally designed to address the following
objectives: Correct Answer - • To promptly identify loans with well-
defined credit weaknesses so that timely action can be taken to minimize
credit loss;
• To provide essential information for determining the appropriateness of the
ALLL or ACL for loans and leases;
• To identify relevant trends affecting the collectibility of the loan portfolio
and isolate potential problem areas;
• To evaluate the activities of lending personnel;
• To assess the adequacy of, and adherence to, loan policies and procedures,
and to monitor compliance with relevant laws and regulations;
• To provide the board of directors and senior management with an objective
assessment of the overall portfolio quality; and
• To provide management with information related to credit quality that can
be used for financial and regulatory reporting purposes.
Credit Grading Correct Answer - involves an assessment of credit
quality, the identification of problem loans, and the assignment of risk ratings.
Loan officers Correct Answer - Credit grading systems often place
primary reliance on _________ for identifying emerging credit problems
Credit grading reviews Correct Answer - performed by individuals
independent of the lending function are preferred because they can often
provide a more objective assessment of credit quality.
,Loan review system typically incudes: Correct Answer - • A formal credit
grading system that can be reconciled with the framework used by federal
regulatory agencies;
• An identification of loans or loan pools that warrant special attention;
• A mechanism for reporting identified loans, and any corrective action taken,
to senior management and the board of directors; and
• Documentation of an institution's credit loss experience for various
components of the loan and lease portfolio.
Loan review policies typically include: Correct Answer - • Qualifications
of loan review personnel;
• Independence of loan review personnel;
• Frequency of reviews;
• Scope of reviews;
• Depth of reviews;
• Review of findings and follow-up; and
• Workpaper and report distribution.
CECL Correct Answer - Implemented by FASB ASC Subtopic 326-20
Current Expected Credit Losses (CECL) Correct Answer - Financial
Instruments - Credit Losses - Measured at Amortized Cost applies to financial
assets measured at amortized cost, net investments in leases, and off-balance-
sheet credit exposures (collectively, financial assets).
Estimated Credit Losses Correct Answer - an estimate of the current
amount of the loan and lease portfolio (net of unearned income) that is not
likely to be collected; that is, net charge-offs that are likely to be realized for a
loan, or pool of loans.
ASC Topic 325 Correct Answer - Established CECL
Board and Management responsibilities for the allowance Correct Answer -
• Establish and maintain a loan review system that identifies, monitors, and
addresses asset quality problems in a timely manner.
• Ensure the prompt charge-off of loans, or portions of loans, deemed
uncollectible.
, • Ensure that the process for determining an appropriate allowance level is
based on comprehensive, adequately documented, and consistently applied
analysis
Appropriate ALL fir Call Report Purposes must consist of: Correct Answer -
• The amount of allowance related to loans individually evaluated and
determined to be impaired under ASC (Accounting Standards Codification)
Subtopic 310-10, Receivables - Overall.
• The amount of allowance related to loans that were individually evaluated
for impairment and determined not to be impaired, as well as other loans
collectively evaluated under ASC Subtopic 450-20, Contingencies - Loss
Contingencies.
• The amount of allowance related to loans evaluated under ASC Subtopic
310-30, Receivables -Loans and
Debt Securities Acquired with Deteriorated Credit Quality.
• The amount of allowance related to international transfer risk associated
with its cross-border lending exposure.
ASC Subtopic 310-10 Correct Answer - guidance in establishing an
allowance for individually evaluated loans determined to be impaired and
measured under that standard.
Qualitative factors that are likely to cause estimated losses Correct Answer
- • Changes in lending policies and procedures, including underwriting,
collection, charge-off and recovery practices;
• Changes in local and national economic and business conditions;
• Changes in the volume or type of credit extended;
• Changes in the experience, ability, and depth of lending management;
• Changes in the volume and severity of past due, nonaccrual, troubled debt
restructurings, or classified loans;
• Changes in the quality of an institution's loan review system or the degree of
oversight by the board of directors; and
• The existence of, or changes in the level of, any concentrations of credit.
Ratio Analysis Correct Answer - can be useful in identifying trends in the
relationship of the ALLL to classified and nonclassified credits, to past due and
nonaccrual loans, to total loans and leases and binding commitments, and to
historical charge-off levels
Solutions)
Lending Policy Correct Answer - should not be a static document, but
must be reviewed periodically and revised in light of changing circumstances
surrounding the borrowing needs of the institution's customers as well as
changes that may occur within the institution itself.
Loan Review System or Credit Risk Review System Correct Answer -
refer to the responsibilities assigned to various areas such as credit
underwriting, loan administration, problem loan workout, or other areas.
effective loan review system is generally designed to address the following
objectives: Correct Answer - • To promptly identify loans with well-
defined credit weaknesses so that timely action can be taken to minimize
credit loss;
• To provide essential information for determining the appropriateness of the
ALLL or ACL for loans and leases;
• To identify relevant trends affecting the collectibility of the loan portfolio
and isolate potential problem areas;
• To evaluate the activities of lending personnel;
• To assess the adequacy of, and adherence to, loan policies and procedures,
and to monitor compliance with relevant laws and regulations;
• To provide the board of directors and senior management with an objective
assessment of the overall portfolio quality; and
• To provide management with information related to credit quality that can
be used for financial and regulatory reporting purposes.
Credit Grading Correct Answer - involves an assessment of credit
quality, the identification of problem loans, and the assignment of risk ratings.
Loan officers Correct Answer - Credit grading systems often place
primary reliance on _________ for identifying emerging credit problems
Credit grading reviews Correct Answer - performed by individuals
independent of the lending function are preferred because they can often
provide a more objective assessment of credit quality.
,Loan review system typically incudes: Correct Answer - • A formal credit
grading system that can be reconciled with the framework used by federal
regulatory agencies;
• An identification of loans or loan pools that warrant special attention;
• A mechanism for reporting identified loans, and any corrective action taken,
to senior management and the board of directors; and
• Documentation of an institution's credit loss experience for various
components of the loan and lease portfolio.
Loan review policies typically include: Correct Answer - • Qualifications
of loan review personnel;
• Independence of loan review personnel;
• Frequency of reviews;
• Scope of reviews;
• Depth of reviews;
• Review of findings and follow-up; and
• Workpaper and report distribution.
CECL Correct Answer - Implemented by FASB ASC Subtopic 326-20
Current Expected Credit Losses (CECL) Correct Answer - Financial
Instruments - Credit Losses - Measured at Amortized Cost applies to financial
assets measured at amortized cost, net investments in leases, and off-balance-
sheet credit exposures (collectively, financial assets).
Estimated Credit Losses Correct Answer - an estimate of the current
amount of the loan and lease portfolio (net of unearned income) that is not
likely to be collected; that is, net charge-offs that are likely to be realized for a
loan, or pool of loans.
ASC Topic 325 Correct Answer - Established CECL
Board and Management responsibilities for the allowance Correct Answer -
• Establish and maintain a loan review system that identifies, monitors, and
addresses asset quality problems in a timely manner.
• Ensure the prompt charge-off of loans, or portions of loans, deemed
uncollectible.
, • Ensure that the process for determining an appropriate allowance level is
based on comprehensive, adequately documented, and consistently applied
analysis
Appropriate ALL fir Call Report Purposes must consist of: Correct Answer -
• The amount of allowance related to loans individually evaluated and
determined to be impaired under ASC (Accounting Standards Codification)
Subtopic 310-10, Receivables - Overall.
• The amount of allowance related to loans that were individually evaluated
for impairment and determined not to be impaired, as well as other loans
collectively evaluated under ASC Subtopic 450-20, Contingencies - Loss
Contingencies.
• The amount of allowance related to loans evaluated under ASC Subtopic
310-30, Receivables -Loans and
Debt Securities Acquired with Deteriorated Credit Quality.
• The amount of allowance related to international transfer risk associated
with its cross-border lending exposure.
ASC Subtopic 310-10 Correct Answer - guidance in establishing an
allowance for individually evaluated loans determined to be impaired and
measured under that standard.
Qualitative factors that are likely to cause estimated losses Correct Answer
- • Changes in lending policies and procedures, including underwriting,
collection, charge-off and recovery practices;
• Changes in local and national economic and business conditions;
• Changes in the volume or type of credit extended;
• Changes in the experience, ability, and depth of lending management;
• Changes in the volume and severity of past due, nonaccrual, troubled debt
restructurings, or classified loans;
• Changes in the quality of an institution's loan review system or the degree of
oversight by the board of directors; and
• The existence of, or changes in the level of, any concentrations of credit.
Ratio Analysis Correct Answer - can be useful in identifying trends in the
relationship of the ALLL to classified and nonclassified credits, to past due and
nonaccrual loans, to total loans and leases and binding commitments, and to
historical charge-off levels
