The questions in our March 13 contest to be president for a day of Schmidlap National Bank brought a flood of responses.
Well, not as many as a few years back when we asked about bank dress-down days. But this time four responses were so impressive that I'm going against tradition and naming multiple winners. They are:
- Shawn Heth, product manager of Harland Analytical Services in Decatur, Ga.
- John Dentoni, executive vice president of Young & Associates, a Kent, Ohio, consulting firm.
- John Bryant, field office supervisor in the Nashville office of the Federal Deposit Insurance Corp.
- David Albertson, of Prairie Capital Services.
The questions were:Should you lend to someone who once filed for bankruptcy?
Should bank customers have to borrow on occasion, whether they need credit or not, to keep their credit standing strong?
Is credit scoring a fair and accurate tool?
To the first, Mr. Albertson replied:
"Bankruptcy is no longer the stigma it was 40 or 50 years ago. People make mistakes. Examine the background of this borrower and the circumstances of the bankruptcy. Use some judgment; that's what you are paid to do. It could be that you will have a great loan - and you will certainly have a loyal customer in the future."
Mr. Bryant agreed. "Let's be realistic. If all creditors refused to lend to such parties, then the federal government would pass a regulation that said you had to make such loans." Also, he said, there are extenuating reasons for some bankruptcies, such as immaturity or unavoidable medical expenses. "However, a bankruptcy combined with a less-than-satisfactory payment record would preclude any loans, in my opinion."
Mr. Dentoni said the banker should find out why the applicant filed for bankruptcy, what kind of filing it was, and when it was filed. "Just because an individual filed for bankruptcy does not mean that he or she is no longer creditworthy."
Ms. Heth said she would lend to someone who had filed for bankruptcy if "it was more than three years ago, and since that time he has paid all bills as agreed, with verification from three utilities or other sources.
"I would think this would show the person has had an opportunity to rehabilitate his behavior and has done so," she said.
On the second question, about borrowing for the sake of your credit rating, Mr. Albertson's response summed up the rest. "Borrow when you don't need to? This is almost as DOA as the use of compensating balance," he wrote. "The good borrowing customer is going to tell you where to go if you trot out this old bromide. Can you imagine your attorney advising you to sue someone every once in a while just so he can keep in shape?"
Ms. Heth said that though borrowers should not need a credit record to get a loan, providing a record of responsible payment from utilities or other sources would speed up the process.
Mr. Dentoni strongly opposed for-the-record lending. If he were a community bank president, he said, "I would direct my loan officers to extend credit only when the individual needs credit. Making the loan to build the bank's loan portfolio or because its customer feels it will make his credit report strong is wrong."
On credit scoring, all agreed that it has a lot of value, particularly to sort potential borrowers into high-, medium-, and low-risk groups.
It can help bankers make decisions when they get that "certain feeling in the pit of their stomach," Mr. Albertson said, and can help when deciding what interest rate to charge.
But all four agreed there are exceptions to a credit score's accuracy, such as when a doctor is just starting a practice. The score is only one tool, they said, and should not be a be-all and end-all, as it often is in larger institutions.