We recently had the pleasure of having an outside entity review some of our operations, underwriting, and file management. During this event, we always are curious with what is going on out in the field in terms of credit administration. It is always good to visit with others as it helps you learn how to better add value to the industry. My blog this week will hit on a few of these items.
Perhaps the biggest curse with credit unions and commercial lending is the typical CU has such a strong consumer bend. Credit unions do a great job in serving the member and often offer better terms for the borrower than many counterparts in the industry. There is a focus on making the dream of the member come true. And often, I do see the expectations of the customer are often met and exceeded by the service in the credit union.
In commercial lending, and any lending for that matter, at times the best thing you can do is to say “no”. When the farmer comes in to borrow on another piece of machinery that will sit idle along with the rest of most of his equipment, we focus too often on how we can help they purchase this to help save some income tax expense when the overall cost of the tractor may exceed the value received. Maybe the manufacturer can only afford a $50,000 piece of equipment, but he wants the new $120,000 model. We focus too much on giving them what the member wants instead of what is a sound credit decision for both the CU and the borrower.
Next, there seems to be an absence of critical analysis regarding documents. If we have underwritten a loan with the member reporting $100,000 in the bank and we suggest verifying that with statements, when the statements come in, do you just check it off the list or do you inspect to see how much money is there. If the borrower only has $100 in the account, perhaps the credit is riskier than what we originally thought. Maybe this becomes a credit that you do not want to pursue.
We refer to the earlier practice as “check the box” lending. It is a situation where there is no critical analysis completed on the information that is present in the loan file but all the boxes are checked to say you received the information. What good does that do in helping you identify and manage the credit risk if you only check the box.
We still hear a lot about character lending. I am aware that there are circumstances where this is applicable and necessary. But an over reliance on character lending assumes that all other factors that go into financial behavior will remain the same. You really do not know at what time the company will have a loss too large in a year, or a farmer has one too many years of poorly executed crops that will push the individual who would never miss a payment into handing you the keys to the business. It could also be factors like sickness, divorce, family stress, loss of a key customer, to name a few other factors.
If you originally closed a loan with poor fundamentals and a lack of company cash flow, to a person with stellar character, when the storm clouds roll in, you may be stuck with a loss. If you relied on the character too heavily to fail to adequately collateralize the loan, the loss will be bigger.
Another item that came up is a lack of investing in training and education for your commercial and agriculture team. We do have some great classes that we provide. But we look for other sources for us to learn better and to sharpen our skills. You should as well. Too many CUs will skimp on good credit training which will lead to poor performance in the lending department in the future. As an aside here, if you have a topic that you want to learn more about in the commercial and agricultural area, let us know and we will get it on our radar.
We still hear about and have seen poor file management. In some cases, following up with borrower and guarantor financial statements are not tracked and the data is several years old. Stale data hinders you from fully understanding the current state of the credit today.
There are other items like complete global cash flow analysis, identifying all the factors of the credit during the review time, and strengthening the credit write ups that we can point to as well. We are all working on our end at Pactola to improve each day. Are you working to be better or are you satisfied with where you are?