Credit Policy 7: Exceptions Aren’t Loopholes, They’re Risk Decisions

Every lender has exceptions. The question is: are you managing them or are they managing you?

I've seen shops where “exceptions” were the norm every file had one. The policy was technically there, but nobody followed it. And the result? Inconsistent approvals, portfolio imbalance, and more sleepless nights for the risk team than anyone wants to admit.

But exceptions aren’t bad. In fact, they’re necessary especially in the non-bank space. The key is writing them into your credit policy with structure, control, and purpose.

Define What an Exception Actually Is

You’d be surprised how many lenders don’t define this clearly. That leads to confusion, especially for newer underwriters or support staff.

Your credit policy should specify:

• What qualifies as an exception

  (e.g. LTV above policy, insufficient GDS/TDS, recent credit event, missing documentation, property type outside mandate)

• What does not require exception handling

  (e.g. minor credit score variance, CRA balance with repayment plan, self-employed income with bank statements)

Once you define it, you can manage it.

Create a Formal Exception Process

Here’s what a clean exception flow looks like:

1. Flag: The underwriter identifies a policy deviation.

2. Document: A written exception summary is added to the file.

3. Justify: Compensating factors are clearly outlined.

4. Escalate: Exceptions are reviewed by a designated authority (credit committee, risk lead, etc.).

5. Record: Approved exceptions are tracked in a centralized log.

Simple, clear, repeatable.

I’ve used a simple template for this: “Here’s what’s outside policy, here’s why we still want to proceed, and here’s the mitigation plan.” It not only improves decision quality, it becomes a training tool.

Track and Trend Your Exceptions

What gets measured gets managed. If your credit team is granting 30% of files as exceptions, that’s not agility, it’s policy drift.

Your policy should require periodic review of exception trends. Questions to ask:

• Are exceptions clustered around a certain broker?

• Are certain underwriters more likely to stretch?

• Are we bending more in certain markets or product types?

• What % of exceptions are later linked to delinquencies?

This feedback loop helps you refine your policy to match reality or tighten it if needed.

Empower Judgement—But Don’t Abdicate Structure

Good credit professionals don’t want to be robots. They want space to make smart calls. A solid exception framework respects that expertise without turning your risk appetite into a moving target.

And let’s be honest: a deal that doesn’t fit your policy can still be a great deal. But only if you know why you’re making the exception and you’re doing it with eyes wide open.

Control Beats Caution

The goal isn’t to eliminate exceptions. It’s to control them. Done right, exception management gives your team flexibility, your leadership confidence, and your investors peace of mind.

In the next post, we’ll look at an often-overlooked distinction: the difference between policy and procedure—and why confusing the two can quietly undermine your entire operation.