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CU Insight

By Mary Ellen Biery, Abrigo
August 29, 2019

Why is writing effective credit memos so vexing? Given that a credit memorandum is one of the most critical documents in the life of the loan, it would seem like a straightforward process.

However, lenders, credit analysts, and other staff frequently seek tips for writing better credit memos.

Writing an effective credit memo is so important to the lending process. The loan committee uses the credit memo in deciding whether to approve the loan, so the lender wants to put forth an accurate and complete picture of the member — not only for the member’s sake, but also for the credit union’s risk management. At the same time, this document can become extremely complex and large because it has a lot of data coming from various sources.

Lenders and credit analysts take member information, financial ratios, any global cash flow analysis, the assigned risk rating, proposed loan pricing, and terms of the proposed loan, and must organize all of this into a cohesive credit memo.

This information will then be used for the initial loan decision as well as for modifications, renewals, or annual loan reviews later on.

In addition, all of this data collected during the loan application and credit analysis should be put together in a way so that credit reviewers or supervisory agencies are able to reach the same decision the credit union did and access the supporting documentation. Not surprisingly, many bankers find the task to be a difficult one.

Templates are critical for efficiency and effectiveness in writing credit memos, according to Alison Trapp, Abrigo’s Director of Client Education. “Everyone knows where to look for a certain piece of information,” she says. An automated credit analysis solution that can create customizable credit memos can also help credit unions incorporate four effective credit memo traits:

• Clear
• Concise
• Organized 
• Relevant

Effective credit memos are clear

Using specifics and staying away from adjectives in the writing can help credit memos be more effective.

Trapp notes that one person’s definition of a tall man might be 5 feet 11 inches, while another’s might be 6 feet 9 inches. “When you’re writing a credit memo, think about the phrase, ‘significant decline in revenue.’ Stay away from that adjective and instead, give more facts,” she says.

Avoiding jargon is another way to make credit memos clearer and thus, more effective. It might be tempting in some industries, such as healthcare or technology, to use a lot of jargon, but that might make it difficult for those outside the industry to follow along, and it might be cluttering up the content.

Effective credit memos are concise

Trapp says focusing on your audience or audiences and their needs will help shape the content of the memo.

Remember that only the salient points need to be included. One common problem with credit memos is that the writers don’t edit out unnecessary information.

“You can’t put everything in there and expect your approver to pull out the relevant points just because you want to cover your bases,” she says. “It’s part of your job to make sure your approvers know what the key elements are to the credit memo.”

Being concise also means choosing words carefully and using the fewest words without sacrificing clarity, she says. Reviewing the memo for opportunities to use simpler words is another idea. “Maybe in college or high school you were incentivized to use more words to get to the word count,” Trapp says. “That’s not the point of a credit memo.”

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To read the full article featuring Abrigo, visit CUInsight, “4 traits every credit memo should have.”