Lending Perspectives: Teaching an Old Dog New Tricks

To get the required confession out of the way, I’m the old dog, and I’m trying to teach myself new tricks.

I joke that surviving in lending for an extended time takes a certain mindset. You must accept that you’re never as good as your best year and you’re never as bad as your worst year. You’ll never get praised for your good years because you should have made more loans and taken more risk, and you’ll get criticized for the bad loans you made during the tough years. As a result, I’ve never had that much incentive to really push the envelope when it comes to growth. I’m a solid double-digit kind of lender. 12-15% per year is awesome. 20% or more? Trouble ahead!

Here’s my second confession: I’m a stubborn guy. I’ve had three employers in 38 years, and two jobs in the last 33. I know what works. I like consistency of decision-making and purpose. I’m in the credit union movement because someone before me had blown up a portfolio that needed fixing. My current employer, Ent Credit Union, also brought me in to fix a broken portfolio and a struggling loan engine. I’ve seen credit unions struggle because of their loan quality. As a result, they had to make difficult decisions that led to dramatic changes to member service and the employee experience as well.

Here’s my third confession: I have a good memory. If you’ve been in the lending business a long time, you’ve survived recessions and remember what you learned along the way. While we’re battling a COVID-19-driven economic downturn now, it’s not the Great Recession (it’s not even technically a recession; look it up). Yet the Great Recession is still fresh on the mind of every lender who lived through it.

Several months ago, I wrote my column about the differences between what we’re experiencing now and The Great Recession. Such a convergence of events that led to that recession that it’s unlikely to be replicated in the foreseeable future. Lots of credit unions struggled but we didn’t. In the past, my portfolios also have experienced several recessions and they did just fine. So did the portfolios of most credit unions, come to think of it.

That said, the growth environment for credit unions has been changing. Members’ needs are different (think digital transformation). The competition is different (think nimble and sometimes less regulated). And so many other parts of all of our lives have been impacted by the pandemic. As a result, over the last few years, Ent CU has worked hard to make a lot of changes to pick up the pace of our growth. The reason for this higher growth goal? It’s not growth for growth’s sake. We must ensure our credit union continues to thrive and remain relevant in our ever-changing industry.

In keeping with this, I’ve concluded after a lot of soul searching that the mindset I’ve had in the past is insufficient in today’s environment. Going back to my lead analogy, today’s dogs aren’t learning to bring in the newspaper anymore. They might be fetching cellphones instead!

With all of this in mind, I am literally trying to teach myself new tricks. In the past I’ve tried to deviate from my core of conservatism and take on more credit risk. I did so using a measured and incremental approach. I like to explain my approach to lending and management of a portfolio as being like a water spigot. I’m not about to turn it wide open. Instead, I make measured adjustments to the flow and test the results before turning the spigot another notch. It takes a while to see the full results, but with this technique I keep the portfolio safe.

In this process, I had to admit that a new approach to taking on more credit risk was needed. Was I up to it? Could I believe in it? Assessing what’s worked in the past, what was possible, and what I needed to do to change my old dog mindset, I came up with three new-to-me tricks:

1.    Anticipate the Recovery

In this case, a good memory has produced the results my credit union really needs now! Instead of remembering The Great Recession, I remembered the recovery from the Great Recession. Back then we were slow to respond, as were most credit unions. Key rates on auto loans and personal loans dropped faster at the banks and a new breed of lenders that were then known as peer-to-peer lenders came into the market. Now we need to take on the challenge of the fintechs.

In addition, during the recovery, near- and sub-prime lenders opened their guidelines to drive volume before credit unions did—and they got a jump start in lending to what many of us think as our “bread and butter.” In general, these lenders tend to be pretty fast to “get in” and “get out” of lending to consumers with lower scores. Doing something fast tends to run against the grain of those of us in the credit union world who take great pride in consistency in serving our members.

I’m anticipating the economy will get better this year, so I’m acting now, which will help Ent  improve access to credit and aid our financial results. We need to start taking on more risk and pricing appropriately for the risk now and not wait until we get the all-clear signal from the economy and the pandemic is over. If our borrowers are employed, we have to anticipate they’ll likely still be employed a year from now and will make their payments. Bottom line: We’re in.

2.    Overbend the Bar

An incremental, slowly-turn-the-spigot approach to taking on more risk just isn’t the right path for us now. I liken our situation to bending a metal bar to a 90-degree angle. When bending metal, you must overbend it to a certain extent, as metal tends to snap back a bit. While I know how much additional credit risk we can take, I need to overshoot that goal. Like a metal bar, underwriters will snap back a bit too. Recently I sat in on a meeting with our underwriters and realized that they, without realizing what they were doing, had also overbent the bar. As a team, we’re on the right path!

3.    Lead with Supreme Confidence

In times of change, employees look to their leaders for support. Lending is a perfect example of this organizational need; there’s nothing worse than lenders lacking confidence and the support of their leaders. I don’t get too excited when times are good, nor do I panic when times are tough. I tend to be cautious and take a wait-and-see approach, but this is not the time for that approach. I must be “all in” with our changes. To enable our team to lend with confidence and consistency, I need to clearly communicate my commitment to the new path. And I need to communicate it often.

In that underwriting meeting I mentioned, I practically gushed about how I loved their approach to find additional opportunities and the key factors in their decision-making. Afterwards I received a lot of appreciation from the staff for my vote of confidence. Frankly, it’s a side of me that haven’t seen much of in the past. Old dog, new tricks!

Consistency has been the cornerstone of my career. More than ever, I’m bought into the fact that whether you’re conservative or aggressive in lending, consistency is key. Consistency combined with quality analytics and proper pricing will lead to success, especially if you’re using your new tricks.

CUES member Bill Vogeney is the chief revenue officer and refers to himself as the chief lending geek at $7.5 billion Ent Credit Union, Colorado Springs.