Glossary
Credit Memo (Credit Memorandum)
A credit memo, or credit memorandum, is the written analysis a lender prepares to recommend approval or decline of a loan. It summarizes the borrower, the request, the sources of repayment, financial analysis, collateral, risks and mitigants, policy exceptions and proposed terms, and it becomes the permanent record of why the credit decision was made.
How it is used in underwriting
A typical credit memo includes a transaction summary; borrower and guarantor background; historical financial analysis with spread statements; cash flow and DSCR calculations; collateral analysis with LTV; industry and market review; a risk rating; key risks with mitigants; sensitivity or stress cases; covenant and structure recommendations; and a list of policy exceptions. Credit officers and committees use it to decide, and examiners and auditors later use it to evaluate the lender's underwriting. A strong memo leads with a clear recommendation and the two or three issues that actually determine the risk, rather than burying them in description.
The most common weaknesses are describing the borrower without analyzing repayment, relying on borrower projections without reconciling them to history, and failing to explain why a policy exception is acceptable. Every figure should trace to a source document, and assumptions should be stated explicitly so a reviewer can test them. Investment committee memos for equity deals cover similar ground but emphasize return potential and value creation, while credit memos emphasize downside protection and repayment. Increasingly, lenders use software to spread financials and draft sections, which makes source traceability and human review even more important.
Frequently asked questions
What should be included in a credit memo?
A credit memo should cover the loan request and purpose, borrower and guarantor profile, financial analysis, cash flow and DSCR, collateral and LTV, industry and market conditions, risk rating, key risks and mitigants, stress testing, proposed structure and covenants, and any policy exceptions with justification. It ends with a clear recommendation.
Who writes the credit memo?
Credit memos are usually written by a credit analyst or underwriter, often working with the relationship manager who sourced the loan. The memo is then reviewed by credit officers and presented to a loan committee or approval authority. In smaller institutions, a single lender may handle origination and underwriting.
How long should a credit memo be?
Length depends on loan size and complexity. A small business loan memo may be a few pages, while a large commercial real estate or leveraged loan memo can run much longer with appendices. Regardless of length, the key risks and recommendation should be clear in the first page.
Related terms
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