Credit Policy 8: Policy vs. Procedure: Knowing the Difference Could Save You

Here’s something I wish more lenders said out loud: policy is not procedure. They’re related but they’re not interchangeable. And when you blur the line between them, you create risk.

I’ve seen lenders with a beautifully written credit policy… and a dozen different ways their teams process files. I’ve also seen lenders with airtight step-by-step procedures but no guiding policy behind them. In both cases, you get inconsistency, confusion, and eventually, exposure.

So let’s give this division some consideration.

What Is Policy?

Policy is the what and the why. It defines your risk appetite, your lending mandate, and your guardrails. It lives at the strategic level.

Think of policy as your organization’s official stance on risk.

Examples:

• “We lend up to 80% LTV on owner-occupied first mortgages.”

• “We do not fund raw land outside municipal boundaries.”

• “We require 90-day bank statements to verify down payment.”

These are non-negotiables, or at least, anything outside them requires an exception.

What Is Procedure?

Procedure is the how. It’s your daily operational playbook, the steps an underwriter takes to get from submission to funding. It lives in the trenches.

Examples:

• “Check that two pieces of ID are uploaded to the CRM.”

• “Call employer using a number from the company website.”

• “Upload appraisal to internal checklist and confirm appraiser license.”

Procedures bring policy to life but they’re also more fluid. You can tweak a procedure without changing your overall lending approach. That’s not true with policy.

Why This Distinction Matters

Here’s what happens when the two get mixed up:

• Overreliance on “this is how we do it”: If a team follows outdated procedures thinking they’re policy, they may miss new risks or fail to comply with updated rules.

• Lack of enforcement: If underwriters treat policy like a suggestion because procedures are too informal you lose consistency and open the door to exceptions that were never meant to happen.

• Poor training and onboarding: New hires struggle when expectations aren’t clear. Is this a rule? A habit? A suggestion? Without clarity, your culture gets diluted.

Make It Work Together

The best lenders build both and keep them in sync.

Here’s how:

• Start with policy. Write clear, principles-based rules that reflect your risk appetite and product strategy.

• Support it with procedure. Build step-by-step guides that explain how the policy is implemented.

• Review regularly. If your policy changes, your procedures must follow and vice versa.

• Train deliberately. Don’t just teach people how to complete a file. Teach them why each step matters.

Protect Your Process and Your Portfolio

When policy and procedure are aligned, you get consistent decisions, cleaner audits, and faster onboarding. But more importantly, you create a credit culture rooted in understanding, not just repetition.