As the housing industry continues to
struggle in the face of a declining
economy, much has been made of how lending institutions have hurt themselves through questionable mortgages to
people who were not in a position to be
able to pay the loans back. If these institutions had practiced good credit administration, perhaps they wouldn’t be in
the position they find themselves today.
“Sound credit quality assures customers
that their deposits are safe and sound,”
says Rhonda Harper, an assistant vice
president of banking at Wells Fargo in
Houston. “That’s very important in our
industry in this day and time.”
Smart Business talked to Harper about
how good administration can take some
of the risks out of banking.
What constitutes good credit administration?
There are several components. No. 1 is
sound credit quality. The soundness of a
financial institution offers its customers
some assurance that their deposits are
safe and their funds are available for lending in the communities in which they
operate. We’ve all seen the current industry deal with institutions such as Bears
Stearns and how its situation has shaken
the industry to its foundation.
Another component is managing your
customers’ expectations and being your
customers’ advocate by communicating
with them in a timely manner and getting
forthright responses to them so that they
understand the expectations from the
start. As a bank, we follow up; we don’t
just close a loan and forget about them.
Periodically, we contact customers to see
how things are going and let them know
that we’re there for them and that they
can let us know if they need anything.
Finally, it’s knowing your customer is
key, asking questions, listening to customers and helping them uncover their
needs. Making periodic visits can provide
a lot of insight and a lot of information
you couldn’t get over the phone.
What kind of safeguards can help make
sure these components happen?
First is a good sound credit policy. Limit
your losses and institute credit policies
that are going to give you a way to recognize early warning signs. If you get periodic financial statements from your customers you should review them in a timely manner and address anything that may
be of concern.
Once you set your guidelines, stick with
them. Sometimes, we approve transactions on an exception basis, and when
you do that, you need to be sure that the
risk is mitigated with sound judgment. A
consistent application of your underwriting criteria is one way to be sure the risk
is within a safe range.
What are some common mistakes that are
made?
Not following your credit policy guidelines is huge, along with not reviewing the
financials in a timely manner once you receive them from your customers and
ignoring early warning signs that pop up.
If customers have repeated overdrafts
and are fully advanced on their line of
credit, that might be a sign that you need
to get out and pay them a visit. Get a current copy of their financial statement and
ask questions to see what’s going on.
A lot of times, if we recognize the signs
and get out there early enough, we can
prevent them from maybe digging a deeper hole. Banking is a working relationship, and maybe we have a product or
service that the customer can benefit
from before it’s too late. To me, it’s good
old-fashioned common sense and following your guidelines.
What can be done if an error is committed?
First, you need to fix the problem and
educate your staff and your bankers. We
have an approval delegation with a chain
of approvers to help the bankers make
sure we’re aware of everything we need
to know about the credit. It’s very important to have another set of eyes, a bit further removed, that can look at the credit
and pick up something the others may
have missed.
Again, one of the most important
things to do is to step back and periodically look at your portfolio to see what
you’ve missed and then to take appropriate action to correct the mistake and
make it right.
Does the size of the company reflect the
amount of risk for a loan?
You can have a different set of standards for different-sized loans. If you’re
talking about a deal that’s more than
$2 million, you may require periodic
financial reports, quarterly information
and a different set of rules because your
risk is increased.
RHONDA HARPER is an assistant vice president of banking at Wells Fargo in Houston. Reach her at (713) 209-6647 or
[email protected].
Assistant vice president of banking
Wells Fargo
