Loan Committee: Role and How It Evaluates Loan Quality

What is a loan committee?

A loan committee is a group of senior managers at a bank or lending institution tasked with approving, modifying, or rejecting loan requests that exceed the approval authority of frontline loan officers. Committees typically include senior executives (for example, the chief risk officer or chief financial officer) and make binding decisions on large, complex, or higher‑risk credits.

Primary responsibilities

• Review and approve or reject new loan requests that are beyond loan officers’ authority.
• Reassess maturing loans that are up for renewal to determine whether terms should be continued, adjusted, or closed.
• Set lending standards and ensure individual loans conform to the institution’s credit policy and risk appetite.
• Decide collection and workout strategies for delinquent loans.
• Ensure lending activities comply with applicable laws and regulatory requirements.

Determining loan quality

Loan committees evaluate creditworthiness using a combination of quantitative and qualitative factors. Their decisions are intended to balance the institution’s return objectives with risk management and regulatory compliance.

Key elements of the evaluation:
* Borrower credit history: past repayment behavior and credit scores.
* Financial condition: assets, liabilities, liquidity, cash flow, and debt service coverage.
* Purpose and structure of the loan: collateral, covenants, maturity, and repayment plan.
* Industry and macro risk: sector outlook and economic forecasts that affect borrower performance.
* Mitigants and controls: guarantees, pledged collateral, insurance, or covenants that reduce loss exposure.
* Scenario analysis and forecasting: sensitivity testing and stress scenarios to gauge downside risk.

Credit information sources

Committees rely on credit reports and scores from the major U.S. credit bureaus—Experian, TransUnion, and Equifax—along with internal credit models. Typical credit score components include:
* Payment history
* Total amount owed
* Length of credit history
* Types of credit used
* Recent credit activity

Modifying terms to mitigate risk

A committee can approve a loan on different terms than requested to reduce risk—for example, by tightening covenants, shortening maturity, increasing pricing, adding collateral, or requiring guarantees.

Handling delinquent loans

When loans become past due, the committee determines appropriate actions based on policy and the borrower’s situation:
* Grace periods, late fees, and required catch‑up payments.
* Restructuring or workout agreements to restore servitude and avoid default.
* Charge‑offs, foreclosure, or legal remedies when recovery options are exhausted.
Delinquency also typically impacts borrowers’ credit reports once payments are 30 days past due.

Regulatory and compliance role

Loan committees must ensure lending practices comply with banking regulations, bankruptcy and receivership rules where relevant, and internal governance standards. Their oversight helps protect the institution’s capital, reputation, and regulatory standing.

Conclusion

Loan committees play a central role in a lender’s credit governance, balancing growth and risk by reviewing large, complex, or risky credits; re-evaluating renewals; setting terms to mitigate exposure; and directing collections and workout strategies when loans become delinquent. Their decisions are informed by borrower financials, credit bureau data, collateral and covenants, industry outlooks, and stress testing.