It is the responsibility of the bank s Board of Directors to formulate policy to guide management toward the objectives of the bank. A number of cases have surfaced recently where members of a bank's Board have been personally liable for loan losses incurred because they abdicated their policy-making responsibilities to management. A formal and comprehensive lending policy gives the Board the opportunity to delineate the responsibilities that they entrust with management and to inject legal parameters into the lending function.

The lending policy does not have to be all-encompassing. In fact, an overly restrictive policy invites noncompliance. Rather, a lending policy should be general enough to be flexible within a complex and changing business environment, yet require management to act within certain guidelines consistent with the philosophies of the Board. Some guidelines to consider are:

1. Loan approvals
   1. Individual officer lending limits
      - Dollar amount and other conditions warranting Board approval prior to disbursment
      - Formal approval procedure identified
      
   2. Board discussion and approval of annual or seasonal lines of credit

2. Loan types
   
   1. Desirable types
      
   2. Undesirable types

3. Trade area identifications

4. Community needs
   
   1. Prohibition of discriminatory lending criteria
      
   2. Identification of investment needs of the community

5. Legal and regulatory compliance

6. Collateral
   
   1. Acceptable types
      
   2. Acceptable quality

7. Formal repayment programs at inception of loan

8. Minimum financial and credit information requirements

9. Aggregate lending level and loan-type mix for the bank

10. Loan profitability
    
    1. Interest rates and sensitivity to market rate fluctuations
       
    2. Service charge, late charge, and commitment fee policies
       
11. Acceptable risk assumption

12. Loan review procedure
    
    1. By officers
       
    2. By audit department or loan review section
       
13. Liquidity of portfolio

14. Monitoring of loan portfolio
    
    1. Delinquency and individual collection problems
       
    2. Large maturing loans
       
    3. Yield

Provision should be made for the annual review, revision and approval of the lending policy. The need for annual reaffirmation is evidenced by a changing business environment, changing composition of the directorate, and a changing statutory and regulatory environment.

he bank's current lending policy should be reviewed with attention given to its adequacy in regard to the guidelines listed above. If no formal policy is in effect, one should be developed. There are many publications available that deal with the formulation of lending policies for various sizes of institutions. The lending policy should be maintained in the policy book pursuant to Bank Bulletin No. 17. Beginning September 30, 1979, bank examiners will review the lending policy and the degree of management's compliance with the policy.

Signed:	Richard J. Francis, Commissioner
	Gifford Knudsen, Director, Bank & Trust Division
Dated:	July 3, 1979