March 12, 2012

Credit unions need to ensure a separation of the credit underwriting and credit administration functions in their business lending departments, say Jim Devine, founder, chairman and CEO, and Bob Hogan, founder, president and COO of Hipereon, Inc., Redmond, Wash.

The two led a recent CUES Business Lending Premier Networking Group, where they discussed the importance of proper business lending staffing.

The goal is a safe, sound and profitable credit portfolio, and keeping the underwriting and administration functions separate is important. “If regulators had a perfect world … they would like to see a separation between the two,” Devine said.

The credit side creates risk for the CU by generating new business. This function analyzes, recognizes and accepts risk on behalf of the CU. On the other side, credit administration manages risk for the CU by constantly reviewing, monitoring and updating the risk associated with each outstanding loan until it is collected, either under the normal course of business or abnormal circumstances.

The credit underwriting staff will be responsible for credit production and the initial credit quality. The credit administration staff will be responsible for the ongoing credit quality and the CU’s business lending procedures and policies.

For example, the business lender will be responsible for:

• Hunting loans: They need to be able to seek out new business and build strong networks. They need to demonstrate strong interpersonal skills, good organizational skills, business model expertise, good understanding of membership makeup and have proven sales skills.
• Underwriting: They need to analyze the risk and put together a solid loan package. The preferred skills include: strong analytical and mathematical abilities, business model expertise, solid understanding of accounting principles, consistency, and three to five years of demonstrated underwriting experience.
• Communication: The lender must have the ability to articulate, verbally and in writing, the potential of the loan to other staff and the member. Necessary skills include the ability to relate complex issues in a common sense manner; the ability to relate to different personalities; and a strong grasp of what the numbers mean.
• Decision Making: The lender needs to recommend a position on the loan application and defend that position to the credit review committee. He or she needs to demonstrate sound judgment, strong convictions, and a proven track record of decision making.

One lender can serve 25-50 relationships, possibly to 75-100, said Devine.

Devine and Hogan recommend one credit administration employee per every two or three lenders.

The credit administrators are responsible for:

• establishing procedures and policies (including loan mix strategies, pricing strategies and approval authorities);
• maintaining the proper loan documentation (including standard credit applications, credit memorandums, loan file documents, agreements and notes);
• running/monitoring the core processing system;
• performing an annual loan review (which assesses each credit to see if it continues to be well secured and self liquidating);
• making and monitoring loan policy waivers;
• establishing/managing a risk rating system (There are many systems to help determine risk, said Devine. “No matter what system is used, the ability to repay should be the overriding consideration and all other factors combined should not supersede it.”);
• preparing the problem loan list (a few examples of items to include are: overdraft reports, past due/delinquency reports, loan coming due/maturity reports, credit reports, collection monitoring logs, bankruptcy notifications and delinquent tax reports);
• managing problem loans/workouts (decide if the problem is curable and devise a plan or, if not curable, identify options for loan recovery);
• calculating the ALLL; and
• managing loan charge-offs.

Theresa Witham is a CUES editor.