Olea’s Simple Framework for Improving Your CDFI’s Loan Policy
Plus our free CDFI Loan Policy Checklist!
A practical framework for structuring, strengthening, and auditing your CDFI's loan policy, built from over a decade of writing real loan policies and underwriting against them.
Your loan policy is the bedrock of your organization’s mission, risk appetite, and day-to-day operations. Unfortunately, most CDFIs struggle to write—and then to update and maintain—their credit policy document. But maintaining a strong credit policy doesn’t have to be difficult. The simple truth is that most CDFIs are asking their loan policies to do too much. That’s where Olea’s 3-document governance framework comes in.
The CDFI governance framework
Olea staff have spent years writing CDFI credit policies and underwriting loans against them. We know what holds up in practice and what doesn't.
Here’s the rub: your policy is a big, formal, important thing that needs a lock that only your board can open. Your team and your clients, on the other hand, need practical, flexible guidelines for functioning on the ground.
Too many lenders ask their policies to define both the ‘what’ and the ‘how.’ The result is a document too complicated to keep updated as your organization evolves. It quietly goes stale, stops being useful to anyone, and leaves your lending team without the support they need to move loans efficiently through your process.
Our fix? Keep policy, procedures, and products separate, using these three documents:
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This is a governing document that defines the what and why of your lending program: the credit standards, thresholds, eligibility criteria, and approval authorities that govern every lending decision. Any changes to this document should require board-level approval.
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This is a staff-facing document that provides step-by-step instructions for executing the policy approved by the board. It should cover: roles and responsibilities, document organization, submitting a loan for underwriting, sending a loan for approval, generating closing documents, boarding loans, managing collections, etc. Any changes to this document should require management approval.
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This is a borrower-facing document that gives staff, partners, and prospective borrowers a menu of available loan products, including current terms, rates, fees, and eligibility requirements. Unlike policy, it can be updated by staff as products and pricing evolve, with no board vote required.
Once you understand what should not be in policy, you can focus on what your policy does need to include. The core questions a loan policy document should answer are remarkably consistent, even though every lender's answers will differ.
What should a strong CDFI loan policy include?
A CDFI’s loan policy is the foundation every credit decision is built on—procedures and products should flow out of policy, not the other way around. Our CDFI loan policy checklist breaks an effective policy into its component parts. It reflects industry best practices and our own recommendations, built from more than a decade of writing CDFI credit policies and underwriting thousands of small business loans.
You can download our checklist below for details on each sub-section and what it should cover. Here’s a high-level overview of what should be included:
Introduction & Organizational Overview
Ethics, Governance & Compliance
Loan Products & Structure
Eligibility Requirements
Capitalization & Use of Proceeds
Underwriting Standards
Approval Authorities
Loan Closing & Disbursement
Loan Servicing & Monitoring
Collections & Workouts
Portfolio & Risk Management
Compliance & Fraud Prevention
Appendices
Checklist in hand, how does your policy stack up?
How to audit your organization’s loan policy
If your policy is stale or doesn’t reflect how your organization works today, we recommend starting with an audit. A policy audit has three goals:
Identify any gaps and recommendations for improvements in written credit policies
Document them in a clear checklist
Score the policy against an objective rubric
Keep in mind: an audit assesses what your policy says in writing. It does not assess whether you have a well-built loan program or not. Good practices often exist before they are codified. The goal is preventing those practices from being inconsistently applied, lost to staff turnover, or challenged by a funder or auditor who expects to find written guidance behind a decision.
A policy audit isn't a pass/fail exercise. It's a look at what your credit standards actually say, and whether they say it clearly enough to be useful to your team day-to-day. For each item on the checklist, ask two questions: Is it there? And is it thorough enough?
Thoughtfully assess whether each element of your loan policy is:
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Specific enough that two different staff members would reach the same conclusion. Thresholds, authorities, and processes are named.
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The topic appears, but key components are missing or open to interpretation.
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The topic is missing altogether
Olea exists to help lenders build and sustain the infrastructure they need to meet their missions, whether that involves hiring us to help or not. You can use our checklist to do your own policy audit, or reach out to have us do it for you. Our Policy Audit costs $900 and includes a scoring matrix as well as notes and feedback specific to your organization for each section.
To engage Olea for a policy audit, or for help drafting your policy, procedures, or product guide, reach out! We can help.