Audit Committee Miscues on Third-Party Loan Reviews
by Phil Love, Pactola President/CEO
CAP Senior Member

The audit committee (or supervisory committee) of a credit union serves an important function of oversight. In September 2019, the NCUA approved new guidelines in amending (streamlining) Part 715 governing the responsibilities of a federally insured credit union to obtain an annual supervisory committee audit for the institution. These committees often employ different external or internal third parties to perform these functions. 

Many of these committees only interact with a third-party loan review company when they hire the company and when the report is delivered. This weak audit committee oversight can lead to a significant amount of money spent on a report with little to show for it other than fulfilling one of the items on the examiners’ check list.

One symptom of this is allowing the third-party vendor to drive the loan review bus. This starts with employing a vendor with no specified contract or a rather vague contract or maybe no contact at all. The end result is the report matches the original goals the credit union had, since they had none at all! It is important the committee have strong input on the scope of service they want to receive from the firm they hire.

Another issue is when unqualified internal staff are used to complete a third-party credit risk advisory review. We once worked with an institution who used an internal auditor to complete a review of the risk of a handful of commercial credits. The worker only completed audit work as a portion of her job function and also had no training in commercial credit. The review ended up recounting consumer lending laws and how many of them were not followed for the commercial loans. Also, the reviewer used various consumer lending ratios and guidelines when judging the risk in the commercial credit. Consequently, the entire review was worthless and a waste of staff time to the credit union.

Using a generic as compared to a risk-based approach for the review is another common shortcoming. One institution called me about a third-party review they received which the company took a sampling of various loans randomly and attempted to form overall opinions on the condition of the credit department. The problem came with the random samples. The credit union had over 60% of their business portfolio in agricultural credits and another 20% in small business C&I lending. Not one credit in either of these areas was pulled for review, so there was no inspection of the areas with the highest possible risk since they were the most active lines of business. 

The audit committee not asking tough questions during a review is also a shortcoming. We have seen too many reviews completed which were blindly accepted by the audit committee without any serious questions asked to the vendor. There are often some items in the review that individual committee members failed to understand, yet they kept silent during the presentation to their group by the vendor. This dovetails into another quandary; do you have competent people on the committee to judge if your commercial staff is doing their job correctly?  Placing someone on that committee who has no business background or lending acumen is a sure bet to not receive the true value you desire. 

The final shortcoming to avoid is to only hire a third-party review just to fulfill the expectations of the regulators. I know that some actions we complete in an institution are to keep the regulators happy. The problem with only getting a third-party review to check the box is that there is considerable cost in this function and there is so much value available in a good review to help the institution understand their current status and also point a path toward future growth. 

Good reviews should identify systemic strengths and weaknesses in the institution now. This should cover areas of credit risk analysis, policy review, staffing, technology, underwriting, file management, problem loan administration, and business line growth, to name a few. The best reviews should offer actionable steps to make marked improvements in each area, improvements that either correct weaknesses in the department or build further on strengths that are already evident. 

These reviews can provide wonderful insight to improve and grow, yet many of these fall far short. Much of this comes from the audit committee failing to do their job in selection, contract negotiation, and oversight into the process. These shortcomings can be overcome, and good value can be achieved with these third-party reviews. If you have questions, contact us and we can help!

Pactola is a CUAD CAP Senior Member and a subsidiary of Midwest Business Solutions. We are a Credit Union Service Organization that is dedicated to commercial and agricultural lending and serving multiple credit unions and banks throughout the United States with our services. We help our partners increase their earning assets and profitability. By doing so, we help them become a relevant financial force in their community increasing social good through helping businesses and farmers. Visit our website to learn more. You can contact Phil Love, Pactola CEO at or 605.223.5154.


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