Credit Memo

A credit memo, short for credit memorandum, is the underwriter's written case for or against a loan. It pulls together what the lender knows about the deal and makes a recommendation: approve, decline, or approve with changes. Approvers and the credit committee read the memo to decide. Later, auditors and examiners read it to see how the decision was made.

Formats vary by lender and loan type, but most memos cover the same ground:

• The request. Borrower, amount, purpose, term, rate and structure.
• The borrower. Business history, management and ownership.
• Repayment. Cash flow, coverage ratios and the main source of repayment.
• Secondary support. Collateral value, guarantors and cash on hand.
• Risks and mitigants. What could go wrong and what offsets it.
• Policy exceptions. Any place the deal falls outside policy, and why.
• Risk rating and recommendation.

Why it matters for lenders

The memo is where underwriting turns into a decision someone can act on. A clear memo lets an approver grasp the deal quickly and ask the right questions. A weak memo buries risk in detail or leaves out the one fact that matters.

The memo is also the lender's main record of its reasoning. If the loan goes bad, or an examiner asks why it was approved, the memo is the first thing they read. US bank standards expect loan files to show the loan's purpose, the source of repayment and the borrower's ability to repay. A memo that ties each number to its source makes that easy.

Software can draft parts of a memo, such as a borrower summary or a table of ratios. The recommendation itself should stay with a named underwriter who signs it and owns it.

How it works in practice

A loan officer at a community development financial institution (CDFI) prepares a memo for a $150,000 loan to a childcare center. She pulls figures from the financial spreading she has already done, the credit report summary and an appraisal of the building. She shows that enrollment dipped during a staff shortage but has recovered.

She flags one policy exception: the owner's credit score is below the usual range. She explains why steady cash flow and a long record of on-time rent payments offset it.

In a spreadsheet setup, she would copy numbers into a Word template by hand. If the spread changes after a correction, the memo quietly goes out of date. When the memo reads its numbers from the same record as the spread, the figures stay in sync. The committee's vote and any conditions are then saved on the loan, next to the memo.