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 Rhonda.Harper@wellsfargo.com.
Assistant vice president of banking