Ancin Cooley, CIA, CISA, of Synergy Bank and Credit Union Consulting, recently presented at the 2017 Sageworks Risk Management Summit on the Perspectives of Lending Dysfunction: Loan Officers, Credit Analysts and Loan Reviewers. According to Cooley, the major cause of dysfunction between the lending department and credit risk function is an inability to see or appreciate the other function’s perspective. Different perspectives can impact the way departments communicate and understand one another.
How do different perspectives impact financial institutions’ ability to make money?
– Slow customer response time – If a loan officer has a new deal but is unable to communicate properly with the credit department, it will slow the department’s return and response time. The problem could be incomplete or inaccurate information on the deal.
– High risk concentrations – Certain loan officers are more comfortable finding and building relationships with certain types of borrowers, for example multi-family CRE, and that tendency can lead to an unintentionally high risk concentration. Long-term, that could imbalance the institution’s portfolio and risk appetite if left unchecked.
– Weak identification of risk factors – Lenders may not recognize potential refinancings in the portfolio if they do not have a clear understanding of the risk factors that loan review uses to assign ratings.
Additionally, communication between departments is critical for long term success.
“Financial institutions that embrace vulnerability, perspective and communication are the ones that last the long haul. Technical skills are important, but often it is the softer skills that get things done,” noted Cooley in the presentation.
During Cooley’s presentation, he gave an example of performing an annual review for a loan to a business that sells swim suits. The customer is located next to a swimming facility and is having trouble making their monthly payments while on a term loan. “Maybe it is not because they aren’t doing well; maybe it is because the loan was not underwritten properly in the first place,” says Cooley. “If the loan officer had communicated about the loan up front, the institution would have been able to do something differently. Thus, communication, vulnerability and perspective is something that should be engrained in credit culture.”
4 Ways to improve communication across functions
In the presentation, Cooley gave some tips for how lenders, credit analysts and loan reviewers can strengthen cross-team communications, and here are five that an institution can enact today.
1. Always provide options. The lender may approach a new deal expecting the terms to be X, but that narrow perspective may limit the credit analyst’s opportunities to underwrite the loan. Instead, both parties can quicken the process by providing options or different terms that may be more amenable to the institution’s risk appetite today.
2. Anticipate questions. The borrower may be different loan to loan, but the handoffs that take place as information goes from lender to analyst to loan reviewer repeats for many loans. After working with those teams habitually, each begins to understand the questions that the others will ask. Rather than wait for the questions to come up (e.g., “What is the business’s historical revenue growth?” or “When was this appraisal updated?”) proactively prep answers or, better yet, address them outright. Withholding information only tends to delay the process.
3. Respect the process. Loan policy at the institution is purposeful, and it explains systematically how a deal should flow through the institution. When a lender has an urgent or competitive deal, however, that process and the lender’s patience can be tested. Cooley, in his presentation at Summit, recommended that all parties, however, respect the process as it is outlined in policy. Those steps are important for the institution’s credit culture.
4. Get excited. Loan officers may approach a deal with tremendous vigor because loan-growth is their job. They are compensated and energized by bringing in the new business. Analysts and loan reviewers may not have that same perspective. But even stoic analysts can recognize the growth opportunities for the institution when a new deal is strong. Share in that excitement, and loan officers will recognize and reciprocate.
With Sageworks Credit Risk Solution, credit unions benefit from best-in-class credit risk analysis that accurately measures risk in a relationship at origination and throughout the life of the loan.