Wells Fargo 2008 Annual Report Download - page 60

Credit Risk Management Process
Our credit risk management process provides for decentral-
ized management and accountability by our lines of business.
Our overall credit process includes comprehensive credit
policies, judgmental or statistical credit underwriting, fre-
quent and detailed risk measurement and modeling, exten-
sive credit training programs and a continual loan review and
audit process. In addition, regulatory examiners review and
perform detailed tests of our credit underwriting, loan admin-
istration and allowance processes. We continually evaluate
and modify our credit policies to address unacceptable levels
of risk as they are identified.
Managing credit risk is a company-wide process. We have
credit policies for all banking and nonbanking operations
incurring credit risk with customers or counterparties that
provide a prudent approach to credit risk management. We
use detailed tracking and analysis to measure credit perfor-
mance and exception rates, and we routinely review and mod-
ify credit policies as appropriate. We have corporate data
integrity standards to ensure accurate and complete credit
performance reporting for the consolidated company. We
strive to identify problem loans early and have dedicated,
specialized collection and work-out units.
The Chief Credit and Risk Officer provides company-wide
credit oversight. Each business unit with direct credit risks
has a senior credit officer who has the primary responsibility
for managing its own credit risk. The Chief Credit and Risk
Officer delegates authority, limits and other requirements to
the business units. These delegations are routinely reviewed
and amended if there are significant changes in personnel,
credit performance or business requirements. The Chief
Credit and Risk Officer is a member of the Company’s
Management Committee and reports to the Chief Executive
Officer. The Chief Credit and Risk Officer provides a quarterly
credit review to the Credit Committee of the Board of
Directors and meets with them periodically.
Our business units and the office of the Chief Credit and
Risk Officer periodically review all credit risk portfolios to
ensure that the risk identification processes are functioning
properly and that credit standards are followed. Business
units conduct quality assurance reviews to ensure that loans
meet portfolio or investor credit standards. Our loan examin-
ers in risk asset review and internal audit independently
review portfolios with credit risk, monitor performance, sam-
ple credits, review and test adherence to credit policy and
recommend/require corrective actions as necessary.
Transactions with Related Parties
FAS 57, Related Party Disclosures, requires disclosure of mate-
rial related party transactions, other than compensation
arrangements, expense allowances and other similar items in
Our primary business focus on middle-market commer-
cial, commercial real estate, residential real estate, auto, cred-
it card and small consumer lending results in portfolio diver-
sification. We assess loan portfolios for geographic, industry
or other concentrations and use mitigation strategies, which
may include loan sales, syndications or third party insurance,
to minimize these concentrations, as we deem appropriate.
In our commercial loan, commercial real estate loan and
lease financing portfolios, larger or more complex loans are
individually underwritten and judgmentally risk rated. They
are periodically monitored and prompt corrective actions are
taken on deteriorating loans. Smaller, more homogeneous
commercial small business loans are approved and moni-
tored using statistical techniques.
Retail loans are typically underwritten with statistical
decision-making tools and are managed throughout their life
cycle on a portfolio basis. The Chief Credit and Risk Officer
establishes corporate standards for model development and
validation to ensure sound credit decisions and regulatory
compliance, and approves new model implementation and
periodic validation.
Residential real estate mortgages are one of our core prod-
ucts. We offer a broad spectrum of first mortgage and junior
lien loans that we consider mostly prime or near prime. These
loans are almost entirely secured by a primary residence for
the purpose of purchase money, refinance, debt consolidation
or home improvements. We now hold option adjustable rate
mortgages (option ARMs) in the Pick-a-Pay portfolio
acquired from Wachovia. This portfolio will be managed as a
liquidating portfolio. See page 61 of this Report for additional
information on the Pick-a-Pay portfolio. It has not been our
practice, nor do we intend to originate negative amortizing
option ARMs or variable-rate mortgage products with fixed
payment amounts. We have manageable ARM reset risk
across our Wells Fargo originated and owned mortgage loan
portfolios.
We originate mortgage loans through a variety of sources,
including our retail sales force and licensed real estate bro-
kers. We apply consistent credit policies, borrower documen-
tation standards, Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) compliant appraisal
requirements, and sound underwriting, regardless of applica-
tion source. We perform quality control reviews for third
party originated loans and actively manage or terminate
sources that do not meet our credit standards. For example,
during 2007 we stopped originating first and junior lien resi-
the ordinary course of business. We had no related party
transactions required to be reported under FAS 57 for the
years ended December 31, 2008, 2007 and 2006.
Risk Management
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