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Lending money is a high risk business. When a bank or lender loans money to a creditor, there are great chances of facing losses. This is because there are possibilities that the creditor will default in payment. Therefore, in order to mitigate losses and risk, there is need for best practices in documentation. At the same time, there are requirements for compliance with certain regulations. The NCUA Regulation 723 and MBL Policies are two most recommended guidelines to be followed.

Documentation for Best Practices

Documentation of information related to the loan is very crucial. Therefore, financial institutions and banks lending money must ensure compliance with the following administrative documentation:

• Business Loan Application: There must be proper documented application stating that the person in question applied for a specific loan.
• Personal Financial Statement: Before a loan can be given, lenders must be presented with a financial record. The record will be used for the best practice of evaluating risk associated with lending to the applicant. (The credit bureau issues at least one copy free for all lenders in the US.)
• Three Year Record on Personal Tax Returns: There must be proof of payment of taxes for at least three years.
• Three Year Record on Business Finances/Taxes: If the applicant for loan is a business organization, there must be proof of at least three years of business tax payments.
• Business Debt Schedule: There must be an updated record of the current business debt status.
• Environmental Assessment Form: Depending on the purpose of the loan, there may be need for an environmental assessment.
• Rental Property Feedback Form: If the property where the applicant is located is a rented building, the lender will need more details. The information needed will be asked in a questionnaire.
• Declination Letter: If the information needed for approval of the loan is unsatisfactory, then the lending organization will have to send a declination letter. Informing the applicant about the reason for declining the application is an important best practice.

In addition to these best practices, there may be need for additional information. This can include:

• Business Credit Card Application: This may not be applicable in some circumstances. The need varies according to the target audience.
• Questionnaire for Religious Organizations: If a religious organization is asking for the loan, this questionnaire will be needed to obtain specific details.

The information requested helps lenders to keep track of the creditor. They issue coding, booking and servicing for best practices. The NAICS code and the Financial Statement Expiration date are recommended for in lending and loan administration.

Documentation must be organized and well maintained. Keeping separate filing systems for credits and collaterals documents is a recommended best practice. These ensure management of cases in the pipeline. Additionally, through documentation, lenders can anticipate loan problems and take necessary measures immediately.

Conclusively, best practices in lending and loan administration are very important. Lapses in documentation lead to great losses for lenders (banks and lending institutions).

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