We have all watched hopefully as banks, government and technology providers scraped to put emergency plans and actions into place that would help handle the unprecedented levels of residential loan defaults and foreclosures. Some efforts seem to be working, while others are well intended, but fall short.
One lesson that should be taken from the cascade of residential defaults and foreclosures is how to best prepare commercial lenders for the increase in defaults that is destined in the near future. Most commercial loans made by banks have a five-to-10-year maturity period, placing many of them [that were approved during more lenient underwriting times] up for renewal very soon. Commercial loans have the potential to cause an even bigger problem than residential if they are not handled properly. To put this in perspective, consider that the average consumer loan may be approximately $200,000, while the average commercial loan is about $10 million.
Some banks are still manually handling the commercial loan process either on spreadsheets or through disparate systems. Banks must have an automated, straight-through commercial loan process that provides a higher quantity and quality of data up front, and more efficient management on the backside. Such a system, designed to meet the individual needs of each financial institution, comes at the cost of some flexibility for the loan officers because they will now have to adhere to certain procedures and processes, but if executed correctly, the process will be accurate, secure and still have the feeling of a high-end transaction.
There are two main reasons why commercial lending has not evolved into a more automated and consolidated practice. First is complexity: Commercial loan customers are more sophisticated and have more intricate needs, so lenders often want to cater to them individually. However, well over half of the structures and formats end up being relatively standard.
Secondly, commercial lenders have been reluctant to embrace a new process because they view their role as more of a consultative expert, not just an "order taker." The need for commercial lending to be viewed as a high-end transaction is legitimate and this level of service can — and should — be maintained no matter what the lending process.
A truly straight-through process will in fact appear to be more sophisticated and high end than any other processes. As a standard rule, adding generic tools, such as Excel spreadsheets, to the procedures will not enhance efficiency or accuracy; it is just a temporary aid. After a bank has graduated from spreadsheet lending, it must also understand that point solutions will never solve the big picture issues. For instance, an automated tool that processes collateral straight through does not mean that a bank has straight-through processing. In fact, many banks think their system is straight-through when it is not. Let's run through a quick temperature check:
- When you talk to borrowers up front, are you also prescreening prior to the initial underwriting?
- Do you retain all documents, checks and comparisons on the same platform?
- Does your system monitor and manage the progress throughout the life of the loan?
- Are you entering data at one time and place for all purposes? (This should be a single-step process that takes only one person.)
- Do you handle failure points manually on the same system? (Deduct even more points off your "score" if you have to make assumptions while translating between systems.)
Should you decide to update your commercial lending process, the best advice I've heard came from a bank's executive team that was analyzing the "emerging risk culture" of vendors; make finding a proven automation solution that would work to mitigate portfolio risk the top priority.