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CRB: Credit Risk Management and Lending Regulations

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Credit Risk Management and Lending Regulations

What this domain tests

This domain tests how banks identify, measure, monitor, and control credit risk across the lending lifecycle, and how lending regulations constrain underwriting, servicing, and consumer outcomes. Expect credit policy, underwriting standards, expected loss, concentration risk, loan review, problem-loan classification, and compliance with fair lending and disclosure rules.

Core rules and concepts

  • Credit policy sets eligibility, collateral, documentation, approval authority, and exceptions. Exceptions must be tracked and approved at the right level.
  • Underwriting uses the five Cs: capacity, capital, collateral, conditions, and character. For commercial loans, debt service coverage and loan-to-value are core metrics.
  • Expected loss is PD x LGD x EAD. Regulatory capital is a separate buffer for unexpected loss; provisioning under CECL estimates lifetime expected credit losses.
  • Concentration risk includes single-borrower, industry, product, and geographic exposures. Loan review and risk grading provide early warning.
  • Consumer lending rules include ECOA/Reg B adverse action notices, TILA/Reg Z disclosures, RESPA/Reg X settlement disclosures, HMDA data collection, flood insurance requirements, and appraisal rules.

Worked example

A commercial loan has USD 1 million outstanding, annual net operating income of USD 230,000, and annual debt service of USD 200,000. DSCR is 230/200 = 1.15. If policy requires 1.25, the loan is an exception even though it is performing. If the property is appraised at USD 1.4 million and the loan is USD 1 million, LTV is 71.4%. If policy caps LTV at 70%, the loan breaches two standards. The credit memo must document compensating factors, approval authority, and risk mitigation, not merely state that the borrower has good character.

Traps that cost marks

  • Calculating DSCR with EBITDA instead of cash available for debt service.
  • Using purchase price rather than a defensible appraisal for LTV when policy requires appraisal value.
  • Confusing expected loss with regulatory capital.
  • Missing adverse action timing and content requirements in a consumer denial.
  • Treating a policy exception as automatically prohibited rather than governed by approval and documentation controls.