Increase Loan Production and Improve the Lending Process

Richard L. Sandenaw
December 9, 2008 | COMMENTS

What can a credit union's management team do to improve the credit union's lending process, and more importantly, increase loan production? A few of the goals for this important initiative might be to: 1) reduce the time from a member's loan application to funding; 2) improve lending consistency throughout the credit union; 3) ensure the staff is well trained; 4) improve and maintain loan quality. This article has been written with the objective of providing a step-by-step methodology to achieve improvement since there may be no single magic bullet. A credit union might implement some of the lending strategies offered by well-known lending consultants, implement loan volume incentives, and place more weight on increasing loan production in performance evaluations, but in the long run, a systematic approach to process improvement will produce more consistent and lasting results.

Correct Inconsistencies in Policy and Procedure

The starting point for this undertaking is a thorough and objective review of the credit union's loan policy and its lending procedures. The purpose of this step is to identify inconsistencies, conflicting guidelines and instructions, and any unclear language. It's not uncommon for loan policies and procedures to become inconsistent. They are often written and revised at different times and by different authors. The result can be like a patchwork quilt, and as a result clarity can suffer. After a careful review, when management is satisfied that loan policy and lending procedures have been reviewed and updated, the next step is to conduct lending staff refresher training on the credit union's loan policy and lending procedures. One shouldn't assume that the credit union's lenders are all at the same level of understanding and proficiency. Management is also advised to develop feedback loops with employees on the lending issues they encounter on the job. This is a good way to eliminate unique bottlenecks and problems that interfere with improving a credit union's lending processes.

Evaluate Lending Skills

The second step in improving the lending process is to assess the individual skills of the credit union's lending staff. This assessment can take many forms, including a review of recent loan applications processed and the underwriting decisions that were made. A careful loan-by-loan review will provide information about each lender such as their attention to detail, their tendencies toward greater or lower risk, and their ability to justify the approval or denial decision that was reached. There are additional factors that can be used to evaluate each lender, including the following:

• Review the number and type of loans funded by each lender monthly. Is loan volume consistent with the lender's experience? Is volume increasing or declining? How does loan volume compare to peers?
• Review the individual's lending authority level, years of experience, and the number, type, and caliber of loans produced. Is the lender with more experience tackling more difficult loans? Are the more experienced lenders taking more responsibility to cross-sell each loan applicant on refinancing loans from other financial institutions?
• Review loan quality audit reports and monitor error types by lender and branch office. Does a lender seem to make too many mistakes? Is a lender more concerned about volume than quality? Or, more concerned about quality than volume? One lender may work too fast and be sloppy, and another may be too slow. Neither lender is focused on a meeting the credit union's twin loan production goals of volume and quality.
• Rank the performance of all lending employees. Identify your best lenders and determine if they are recognized properly. After all, they are the employees who are generating new revenue for the credit union. You should also identify your weakest lenders. Maybe they need better training or more motivation. They may be the cause of hidden losses if loans that should have been made are being lost to competitors.
• Assess lending knowledge and any knowledge and/or skill gaps. The assessment of lending skills should lead to an identification of topics for training and coaching. It might be useful to determine if the knowledge gaps are isolated to a few individuals or more commonplace.

Each credit union should develop lending training content based upon identified deficiencies. There has to be confidence that the staff is not just making the easy loans to members with “A” credit. Likewise, there has to be confidence that some lenders aren't making “sore-eyed kitten” loans based on personal sympathy, or lending to subprime borrowers outside the credit union's risk tolerance. Consider training that covers the functions and features of the lending application system and a review of how to read credit reports.

Evaluate Cross-Selling Skills

The third step in this process is to evaluate the cross-selling skills of the lending staff. This is a common concern for senior management at many credit unions but it is a skill that needs specific attention. Management should determine if lenders simply function like order-takers or if they know how to seek out lending opportunities. Questions that should be a part of this cross-selling evaluation are:

• Do the credit union's lenders know how to read a credit report and look for loans to refinance from other financial institutions? It is important to note that many lenders fall short in this important aspect of lending. If they are successful in providing the member a lower rate or a lower payment, the member will be happy and the credit union will add a new loan. If the lender fails to cross-sell, both lose.
• Do the lenders offer loan alternatives and ask for a members' loan business? Many lenders are reluctant to ask for the business. They view their role more as a trusted member service representative than a sales advisor.
• Is loan production by lender monitored and reported monthly? Is your credit union monitoring loan production by lender, and if so, are you using the information to recognize the lenders with the highest volume and best quality monthly?

Investigate Loan Origination Systems

The fourth step in improving loan production should be the implementation of an automated loan decision system that has the capability to automate some steps in the loan underwriting process. Why is this important? First, it saves time. It helps with the easy loan decisions, either approval or denial. It also helps the less-experienced lenders produce loans without as much assistance. All of this improves turnaround and improves member service. Long term, a loan-origination system will improve loan decision consistency, reduce the underwriting time for each loan, open the door for automating a part of indirect lending, and allow initial responses to applications taken over the Internet.

Centralization vs. Decentralization

The fifth step for improvement the lending process is to evaluate the degree of organizational loan decision centralization or decentralization. It is recommended that senior management consider a combination of the two. Lending is effective with a qualified staff to work directly with members in person or over the phone. However, lenders have varying degrees of skill and experience. The newer lenders, the rookies, need more help. They often go to another lender in the office or to their manager for assistance. Instead, consider centralized underwriting support to assist those less experienced lenders. In other words, have a few more experienced employees available to support the loan decision queues throughout the organization to provide quicker loan decisions and better member service.

Marketing and Promotion

The sixth step in improving the lending process focuses on increasing loan volume with improved marketing and advertising campaigns. This step can be more effective if the credit union's MCIF is used for targeted loan pre-approval campaigns. This can be done by identifying members in the “credit driven” categories. Or, by identifying members whose vehicle loans have reached 20 months or more. Or, by identifying members who have not requested a new loan in the past 24 months. Once members are targeted for a campaign, the credit union can use a credit bureau for a credit offer pre-screening. The targeted campaign should include monitoring the results for fine-tuning the next campaign.

Track and Measure Marketing Efforts

The seventh step in this process improvement is often found somewhere near the top of the list. Typically credit unions place marketing emphasis on maintaining regular loan promotion and advertising campaigns throughout the year. This is an important step—but maybe not the first step. Why? Because senior management should be certain that when a promotion is undertaken the best possible results will be achieved. And, if a promotion generates the desired member response, management should also be sure that the lenders are prepared in advance to optimize the results. Think of the downside if a promotion were to attract a good number of potential borrowers only to have some leave dissatisfied by a poor level of service.

Consider this List

The eighth step in improving loan volume is to consider new ideas. Examples are:

• Revamping credit card programs
• Promoting dealer relations and expanding dealer contact in all market areas
• Implementing a loan recapture program.
• Considering ways to reduce portfolio runoff
• Improving the capability of the telephone lending staff
• Changing the approach for indirect lending
• Reviewing credit guidelines
• Evaluating other loan products
• Training branch office lending staff to process less-common loan types
• Adding a loan protection insurance program
• Evaluating new tools and techniques to improve cross-selling at the point of opening new accounts
• Evaluating mortgage lending improvements

What can a credit union's senior management team do to improve the credit union's lending process, and more importantly, increase loan production? Hopefully the approach outlined above will help. Keep in mind that making lending improvements is a process, not an event.

Richard L. Sandenaw is managing partner for Strategic Mark LLC, a business consulting firm specializing in credit unions. Contact him at 915-588-9024 or rsandenaw@strategicmark.org.