(Part 2 of our 2 part collateral series )
by Kylie Mergen, Director of Financial Services
In last month’s communication, we discussed the five steps to a successful collateral verification. This month, we want to explore the common exceptions we’ve documented recently during the reviews. Our Schedule of Eligible Collateral, found in our Member Products and Services Guide, identifies the current underwriting guidelines for each asset category we accept as eligible collateral. Knowledge of our underwriting requirements and applying the guidelines to your pledged portfolio is a critical step in identifying and pledging collateral. Continue to a list of common exceptions.
- Matured loans – Loans with a maturity date before the quarter-end date of the Qualifying Collateral Determination (QCD) form are not eligible collateral. If you are in the process of completing a renewal or modification to extend the maturity date, please complete it prior to quarter end in order for it to be eligible. Tip: Review the maturity date of the loans pledged and exclude loans with maturity dates before the quarter- end date of the QCD form prior to submission.
- Delinquent loans – Our delinquency guidelines allow for delinquency up to 90 days in the one-to-four family residential real property categories and up to 60 days delinquent in most other asset categories. Delinquency is identified as the number of days past due at the quarter-end date of the QCD form. During a collateral verification, we obtain quarter-end delinquency reports. We compare the delinquency reports to the selected sample of loans. Tip: Complete a comparison of the delinquency reports to the pledged loan schedules prior to submission.
- Substandard, doubtful, loss, and non-accrual loans – Classified loans are not eligible collateral. The classification can be by the member or any regulator of the member. Loans on watch are eligible, but once classified as substandard or worse, or moved to non-accrual, the loan becomes ineligible. Your internal watchlist or classified loan reports as of the quarter-end date of the QCD form will be reviewed while onsite to validate against the selected sample of loans. Tip: Complete a comparison of classified loan reports to the pledged loan schedules prior to submission.
- Loans without “wet” signatures – Included in the first underwriting requirement in every asset category is the following:
The note (including extensions, modifications, assumptions, endorsements, and/or renewals) must have “wet” signatures from all borrowers and the original document must be retained.
What does this mean for you? Images from a scanned note or modification do not meet the “wet” signature requirement. Notes or modifications signed electronically with a digital signature do not meet the “wet” signature requirement. Tip: Retain all original notes and modifications for loans to remain eligible. All other documents can be imaged except the note and modifications. If you’re using e-note or e-signature technology, contact me to discuss this issue further.
- Loans without Phase I’s, when required – In our commercial real estate and commercial real estate construction categories is the following underwriting requirement:
No loans secured by real estate that exhibit adverse environmental factors (i.e., gas/service stations, auto repair, auto dealerships or industrial sites that process or distribute toxic chemical substances or mixtures), unless supported, at a minimum, by a Phase I Environmental Site Assessment concluding that no further assessment is warranted.
If you have a loan secured by a property with adverse environmental factors, we will review the Phase I during the onsite collateral verification. If the Phase I requires remediation, we will review the Phase 2. Without a clean Phase I or 2, the loan would be ineligible. Tip: Don’t forget your smaller balance loans in this process. Often, we find missing Phase I’s due to the size of the asset.
- Loans with interest only periods beyond acceptable timeframes – Certain asset categories allow interest only payments; however, term limitations vary based on the category. Since the interest-only term is not uniform for all asset categories, check the guidelines prior to pledging. Tip: If a loan has an interest-only term for 12 months and is extended for another 12 months, the interest-only term is now 24 months. The interest-only term does not start over at the extension.
This is not an all-encompassing list of collateral issues we identify, but hopefully the tips provided will assist you with reporting eligible collateral. Please contact us if we can answer any other eligibility or collateral questions you may have. The Collateral Review team can be reached at 800.905.2733 or CollateralReview@fhlbtopeka.com.