When individual loan officers are responsible for making lending decisions within established credit guidelines, unexpected losses tend to be concentrated. That is, if a particular loan officer is a weak underwriter, only the portion of the loan portfolio generated by that individual shows higher delinquencies and charge-offs.
Management could address this risk in many ways, including by providing additional training for that loan officer and by increasing loan-review activities. Today, many lending decisions are made by automated systems. If the model used for underwriting has a weakness, a systemic asset-quality problem can arise.