5 minutes
… and three smart ways to tackle them.
Most people would agree that inefficient is a label to avoid. Yet, when compared to other credit union concerns—capital adequacy, credit quality, member satisfaction, hiring—inefficiency rightfully and obviously takes a backseat for credit union management.
What may not be obvious, however, is the impact that inefficiency has on those other objectives, including a credit union’s ability to serve members effectively. Many inefficiencies are inherited and accepted as “just the way we do things.” But fresh ideas and processes can challenge the inefficiencies, allowing credit unions to work smarter—not necessarily harder—and provide members with a better experience.
When considering the life of a member business loan—a process that starts with a member business’s loan application and ends with portfolio management until the loan’s maturity date—some common inefficiencies sap a lender’s time and attention.
Any of these offenders can prevent a credit union from attracting qualified new members and providing existing members with the fastest and best response possible.
Four probable sources of inefficiency…
- duplicating data entry, with staffers entering the same data into multiple systems
- returning multiple times to the member to collect necessary documents
- hunting down specific loan officers to understand the status of a loan request
- requiring that analysts key in data again to respread financials when new tax returns or financials are collected from members
... and three smart ways to tackle them:
1) Improve transparency in relationship management activities.
At many credit unions, lenders track outstanding loan applications and sales activities in spreadsheets, calendars and notebooks. Without a centralized record system, it’s challenging for management to measure progress or build predictable forecasts. If the loan is approved, the loan officer likely has to enter the data again, in multiple systems, before booking.
With a relationship management solution that ties into the core system, the core database provides lenders with member information and creates a centralized place for logging conversations. The added transparency of an integrated relationship system can also help loan officers identify other opportunities for the credit union to work with the member.
Business loans often create unique relationship-management challenges. First, MBL credit may involve multiple guarantors, real estate pieces and/or businesses, and it’s helpful if the institution can visualize or quickly tie together all the known touch points. By understanding the co-mingled relationships, an analyst can easily avoid double counting income or debt.
2) Optimize the loan origination process.
The process of taking a business loan from application to closing can take weeks. It involves numerous credit union employees, including loan officers, analysts, loan committee members, loan administration staffers, third parties that supply information, maybe a CUSO team and outside closing agents. As the prospective loan advances from stage to stage, bottlenecks can be created by:
- back-and-forth communication with the member and third parties regarding required documents;
- unbalanced credit analyst workload and bottlenecks, assuming only a few analysts at the credit union have experience with business loans;
- unclear loan-decisioning rules that require added discussion;
- delay as the credit file passes between parties without clear deadlines or without a system to measure progress; and
- disparate data sources for guarantor data, credit scores and reports, existing relationship data, business benchmarks, projections, appraisals, etc.
Without a methodical, comprehensive way to define and track the process, management may be forced to rely on anecdotal information about the status of a credit request. Management should be able to see the status of loan-request tasks and follow an audit trail to keep track of what has been completed (and by whom). Additionally, storing documentation in a transparent and accessible platform can allow all parties to access files for seamless handoffs and version control.
3) Collect current financial information for annual reviews.
The newly released MBL guidance from the National Credit Union Administration specifies that credit unions must have a commercial loan policy that defines a credit risk rating system if the institution is to engage in commercial lending. For a risk rating system to be effective, institutions must be in receipt of current business and personal financial information.
At some institutions, this may take the form of multiple request letters being sent to a single member. Imagine receiving five envelopes from your institution over the course of week, all requesting different data. Could one letter—or even one email—have effectively made the same request and prevented multiple trips to the branch?
It’s possible to streamline the collection process using a software solution that outlines responsibilities, tracks activities and records receipt dates. The visibility and efficiency gains from automating and tracking the correspondence allow lenders to be more proactive in situations of overdue documents or broken covenants—early warning signs for loan review staff. A systematic workflow process and an effective tickler system provide the necessary building blocks for compliance with the new regulatory directives and can replace piecemeal and inefficient communication with members.
While efficiency gains may seem like small wins in the course of managing a CU, they can improve the entire life a loan. Adopting an end-to-end lending solution is one way to ramp up efficiency, but if efficiency gains can be accomplished through process documentation and management, the result is similarly beneficial—a faster turnaround and more convenient borrowing experience for your members.
Libby Bierman is an analyst and marketing director at Sageworks, Raleigh, N.C., where she is responsible for analyzing trends in the financial data collected from private companies as well as building value for Sageworks customers and sharing lending and portfolio risk best practices among U.S. financial institutions.
