Review and discuss with the examiner-in-charge (EIC) the examination scope memorandum. Align the leveraged lending examination objectives with the goals of the examination or supervisory strategy. Assess resources needed for the leveraged lending review in relation to your initial analysis of portfolio risk.

Review the following information in deciding whether previously identified issues require follow-up. In consultation with the EIC and LPM examiner, determine whether bank management has effectively responded to any adverse findings and carried out any commitments.

• Previous report of examination (ROE).

• Bank management’s response to previous examination findings.

• Previous leveraged lending examination working papers or risk assessment summary.

• Bank correspondence concerning leveraged lending.

• Audit reports, internal loan review reports, and working papers, if necessary.

• Supervisory strategy, overall summary, and other relevant comments in the OCC’s electronic information database.

Obtain from the EIC the results of the Uniform Bank Performance Reports (UBPR), Bank Expert (BERT), and other OCC reports. Identify any concerns, trends, or changes in commercial lending patterns since the last examination. Examiners should be alert to growth rates, changes in portfolio composition, loan yields, maturities, and other factors that may affect credit risk.

Obtain the following governing documents:

• The bank’s leveraged lending and loan syndication policies.

• Any separate underwriting guidelines for the bank’s leveraged lending program.

• Defined risk tolerance positions and risk management guidelines.

• Policies defining objectives, controls, and limits on affiliates’ investments in leveraged transactions.

Obtain from the examiner assigned loan portfolio management and review the following leveraged lending schedules and reports as applicable to this area:

• Loan trial balance, past-due accounts, and nonaccruals for leveraged lending.

• Risk-rating stratification reports, risk-rating migration reports.

• Concentration reports and bank definitions of concentrations monitored.

• Exception reports.

• Problem loan status report for adversely rated leveraged loans.

• List of “watch” credits.

• Any management reports used to monitor the leveraged lending portfolio.

• Any useful information obtained from the review of the minutes of the loan and discount (or similar) committee.

• Reports related to leveraged lending that have been furnished to the loan and discount (or similar) committee or the board of directors.

• Loans on which interest is not being collected in accordance with the terms of the loan.

• Loans for which terms have been modified by a reduction of interest rate or principal payment, by a deferral of interest or principal, or by other restructuring of repayment terms.

• Loans on which interest has been capitalized after the initial underwriting.

• Participations purchased and sold since the previous examination.

• Shared National Credits.

• Organization chart of the department.

• Resumes for leveraged lending management and senior staff.

• Each officer’s current lending authority.

• Any leveraged lending profitability, capital usage, and budget reports.

• Listing of deal sponsors that support leveraged loans within the bank.

• Listing of distribution fails regarding syndicated, leveraged loans originated by the bank.

• Listing of committed pipeline exposure on leveraged loans underwritten by the bank.

Based on analysis of the information and discussions with management, determine whether there have been any material changes in the types of customer (based on product line), underwriting criteria, volume of lending, or market focus. Your analysis should consider

• Growth and acquisitions.

• Management changes.

• Policy and underwriting changes.

• Changes in risk tolerance limits.

• Changes in external factors such as

  • National, regional, and local economy.

  • Industry outlook.

  • Regulatory framework.

  • Technological changes

• Discussions with management should cover

  • How management supervises the portfolio.

  • Any significant changes in policies, procedures, personnel, and control systems.

  • New marketing strategies and initiatives.

  • Any internal or external factors that could affect the portfolio.

  • Management’s perception of the leveraged lending credit culture.

  • The findings of your review of internal bank reports on leveraged lending.

  • The extent of syndicated distribution and participation activities, both as a buyer and seller.

Based on performance of the previous steps, combined with discussions with EIC and other appropriate supervisors determine the examination scope and how much testing is necessary.

As the examination procedures are performed, test for compliance with all applicable laws, rules, and regulations, and with established policies and processes. Confirm the existence of appropriate internal controls. Identify any area that has inadequate supervision or poses undue risk. Discuss with the EIC the need to perform additional procedures.

Select from among the following procedures those necessary to meet the examination objectives. Examiners should tailor the procedures to the bank’s specific activities and risks. It is seldom that all steps are required in an examination.