Loan Charge-Off Processing SOP

Standard procedure for identifying, documenting, approving, and recording loan charge-offs for closed-end and open-end accounts, including board ratification and post-charge-off controls.

Steps

• Verify the delinquency aging threshold
  The loan servicing specialist verifies the account type and days past due using the delinquency aging report. - Closed-end loans: confirm the account is 120 or more days past due. - Open-end loans: confirm the account is 180 or more days past due. - Confirm the account is eligible for charge-off under the institution's policy and any applicable exceptions. If the account does not meet the threshold, stop and route the account back to collections monitoring.
• Review the account for exceptions or recovery actions
  The collections manager reviews the account history, collateral status, bankruptcy flags, legal holds, and recent recovery activity. - Confirm whether any approved exception applies. - Document any recoveries, collateral liquidation proceeds, or pending payments that affect the charge-off amount. - Identify any non-conformance with policy and escalate unresolved exceptions to the credit risk owner.
• Prepare the charge-off recommendation
  The credit risk analyst prepares the charge-off recommendation for each eligible account. - Record the borrower account number, product type, delinquency status, principal balance, accrued interest, fees, and recoveries. - Calculate the proposed charge-off amount in accordance with the institution's policy. - Note the reason for charge-off and any supporting comments. - Attach supporting reports or system screenshots as required by the institution's documented information controls.
• Obtain management approval
  The accounting manager or designated credit officer reviews the charge-off recommendation for accuracy and policy compliance. - Confirm the threshold, amount, and supporting documentation. - Approve the recommendation or return it for correction. - Record the approver name, date, and any conditions attached to the approval.
• Submit the charge-off for board ratification
  The chief credit officer or delegated officer submits the approved charge-off package for board ratification in accordance with governance requirements. - Include the account list, charge-off amounts, and approval summary. - Present the item at the next board meeting or through the approved interim ratification process. - Record the ratification reference number or meeting date.
• Post the charge-off to the general ledger
  The accounting specialist posts the approved charge-off to the general ledger and updates the loan servicing system. - Debit the appropriate charge-off expense or allowance account. - Credit the loan receivable balance and related accrued items as required by policy. - Confirm the posting date, amount, and account mapping. - Reconcile the servicing system balance to the general ledger entry.
• Archive the documented information
  The loan servicing specialist archives the complete charge-off record in the document management system. - Store the aging report, recommendation, approvals, board ratification record, and posting confirmation. - Apply the retention label required by the institution's records policy. - Ensure the record is searchable and linked to the account file.
• Monitor post-charge-off recovery activity
  The collections manager monitors the charged-off account for recoveries, settlements, or legal collections activity. - Record any recovered amounts according to accounting policy. - Escalate material recoveries or disputes to accounting and credit risk management. - Maintain the recovery log until the account is closed or written off under the institution's policy.