Credit Decision (also Credit Approval) is an important step in the Credit Origination process in which the lender (creditor or other counterparty assuming a Credit Risk) decides (in accordance with their Internal Governance) to proceed with the granting of credit.
Formally the study and organization of this activity falls under the broader Decision Theory approach, the study of an agent's choices, in particular normative decision theory, which analyzes the outcomes of decisions or determines the optimal decisions given constraints and assumptions. Empirical studies and validation of credit decision approaches fall under descriptive decision theory, which analyzes how agents actually make the decisions they do.
In order to carry out a reliable and accurate creditworthiness assessment, institutions and creditors should design relevant documentation regarding credit decisions and loan agreements in a way that helps identify and prevent a misrepresentation of the information by the borrower, credit intermediary or staff members of the institution that is involved with the assessment of the application.
The creditworthiness assessment performed in accordance with Section 5.2 should be properly documented and used as the basis of the proposal to approve or decline the loan application by the relevant credit decision-maker. The documented outcomes of the creditworthiness assessment itself should be able to justify the proposal to approve or decline the loan application.
The decision to approve or decline the loan application (credit decision) should be taken by the relevant credit decision-maker, in accordance with the policies and procedures and governance arrangements set out in Section 4.3.
The credit decision should be clear and well documented and include all the conditions and pre-conditions, including those to mitigate the risks identified in the creditworthiness assessment, such as risks associated with ESG factors, for the loan agreement and disbursement.
The credit decision should clearly articulate a maximum period for its validity. If an approved transaction is not executed within this period, a new credit proposal should be submitted for approval. Where relevant, due account should be taken in the provisions of Article 14(6) of Directive 2014/17/EU on the duration of the binding offer.
The conclusion of the Credit Agreement should not take place unless the institutions and creditors have verified that all pre-conditions and conditions that have been set out in the credit decision are fulfilled. The disbursement should take place only after the conclusion of the credit agreement.
- EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06