It’s hard to be a leader in lending without an ironclad model. Here’s what you might want to include in yours.
In my personal life, I’m a bit of a people watcher. Sometimes when I go “shopping,” I’m really just watching the people. Similarly, in my professional life, I like watching credit unions—and I’m used to seeing how some are very reactive with their lending operation.
Reactive lenders often fail to anticipate an upcoming recession (I’m good at that; I like to say I’ve predicted seven of the last three of them) or when mortgage applications may surge or dry up as rates change. They may not realize that when consumer demand declines for one loan product, it may surge for another. Few are prepared to ramp up in response to the competition and instead react with what I like to refer as a “me-too” strategy.
There’s a huge gap between “prepared” and “nimble” and also between “not prepared” and “struggling to respond to changes in the operating and competitive environment.” Having a solid business model not only makes it easier to respond to the ups and downs of the economy but ultimately, can help you be a much better solution for your members’ loan needs.
But what exactly should you be including in your model?
It’s no secret that COVID-19 increased the pace of change for the digital delivery of financial services. If you waited for the pandemic to get serious about digital, you’re late to the game. Increasingly, digital delivery is much more than just a good mobile application. It’s providing touch points with members in the manner they want to communicate. It’s streamlining processes and documentation as much as possible on virtually every loan type. It’s all about making it easy for a member to say yes to a loan, especially if they’re pre-qualified. Funding is critical as well! Increasingly, at Ent Credit Union, we can get loans approved and processed well enough. But getting them closed is much more difficult. Digital/video notarization and electronic signatures are a must-have right now!
You can’t rely solely on a service culture without also having a strong emphasis on sales. In short, your lending team members must be motivated to sell loans while still following the concepts of consultative selling. As I have been saying for 25 years, “If there is no (member) need, there is no sale.”
That said, if there is no incentive, there may be no sale as well. I can tell you that over 30 years, every time I’ve increased incentives for our lenders, they’ve paid for themselves. If you believe people will sell and be effective just because it’s part of the job (and you scrimp on incentives), go evaluate your loan-to-share ratio, your net interest margin and your loan staff turnover. Chances are, one or more of those metrics is out of whack.
An area of emphasis I’d like credit unions to consider is their branches (each one individually) as a loan engine. Twenty-five years ago, when I was the lending VP at FAIRWINDS Credit Union in Orlando, I started examining which of our branches were producing the most loans. To a certain extent, the volume was loosely tied to foot traffic measured by the number of transactions. Yet there were exceptions; I found that certain branches with sales-minded lenders “out punched their weight.” I developed a simple metric that I now refer to as “the hustle factor” which is monthly loan volume divided by monthly transactions per branch. The higher the number, the better the branch is doing in converting transactions (think sales opportunities) to loans.
Several different examples can illustrate how transactions can drive loans. When I was at FAIRWINDS CU, the top consumer loan officer was a young man by the name of John. John was a hustler. If he wasn’t helping a member and there were members in line to see a member service rep, John was passing out business cards and loan brochures to everyone in the queue. The craziest idea he ever had (which worked, by that way) was doing the very same thing he did with the line in the branch for the line in the drive-through. Yes, he braved bad drivers, the sun in Florida and carbon monoxide, especially on Fridays, because he knew the drive-through was where the action was that day.
I think one of the more impactful ideas we’ve had at Ent for driving loan volume through transactions was to arm our MSRs with our prequalified loan information. For nearly a decade, if Sally is serving Sarah’s need at the teller line, and Sarah has been pre-qualified for a personal loan, Sally can see the offer and remind and reinforce the loan to Sarah. We’ve had campaigns where as much as 30% of the members who accepted such an offer did so because an MSR brought up the offer and the member accepted on the spot.
Another area of opportunity for credit unions is outbound sales. While the Telephone Consumer Protection Act makes calling your members to offer additional loan products a function of them opting in to receiving calls, it is worth the effort to get that opt-in and then call them. In the early days of my career in the finance company business, every branch employee was required to make calls to generate loans. In the mid-’90s, and again in the early 2000s, I worked to develop the ability to make outbound calls at FAIRWINDS and Ent.
As credit unions rely more and more on indirect lenders, the eternal question has become “How can we make these new members real members?” Our history has shown that it is possible to deepen these relationships, and perhaps the best way of earning the checking account of these new members is by selling an additional loan first! It’s a topsy-turvy way of looking at things; most credit unions bring in new members via a checking account and then find a way to make them a loan.
It’s difficult to be the proverbial jack-of-all-trades when it comes to your loan portfolio, but this is perhaps the most important key to lending operation success. It’s increasingly difficult to focus on just mortgage lending or just indirect auto lending. Balance in your loan portfolio helps your credit union survive economic (and rate) ups and downs.
But what’s the ideal balance? I’m not sure there’s a definitive mix of loans that is perfect for all lenders, but here’s a proposed starting point for a credit union with more than $250 million in assets:
- 10% commercial or business loans
- 45% mortgage loans
- 45% consumer loans
- 5% of all loans (approximately 10% of consumer loans) in credit card
- 10% of all loans (20% of consumer) in home equity
- 3% to 5% of all loans (6% to 10% of consumer) in personal loans
- Most of the balance in auto/motorcycle/boat/recreational vehicle loans
As I mentioned before, when the economy turns, so does consumer demand. Over the last 13+ years at Ent, we’ve struggled to keep up with the demand for mortgage loans. Luckily, we’ve had a strong consumer loan group, along with a solid lender development group for our branch staff (our lending consultants) that has allowed us to feed the mortgage staff pipeline. Our EntRANCE program has also helped us in that regard, most recently when COVID-19 hit and mortgage rates plummeted.
Fast-forward to June 2022, and the shoe is on the other foot. Mortgage volume is down at least 40% from a year ago, and we’ve been moving people from mortgage to our home equity group to keep up with the demand. Yet we anticipated this occurring, and we were able to turn on a dime compared to a lot of our peers.
Participations and Third-Party Relationships
This issue is admittedly a two-edged sword. It’s harder and harder to properly manage your balance sheet on an organic lending model only, meaning you’re lending directly to your members. To be realistic, a truly organic lending model has been dead for 25 years because of the industry’s reliance on indirect lending. Credit unions are exploring and building loan participations and fintech partnerships to give them the loans they need.
Yet how much is too much reliance on loan participations? That’s a good question; my sense is that if more than 10 points of your loan-to-share ratio are from loan participations, you might have issues with your organic model. The last few years have shown us that most credit unions and their member loan demand tend to follow the overall economy. When loan-to-share ratios rise, meaning loan growth outpaces deposit growth, there are more loan sellers than loan buyers. That’s good if you’re relying on loan participations to build your portfolio; lots of big credit unions have loans to sell.
On the other hand, when deposits are flooding in (“cough cough, COVID”) then everyone seemingly needs loans, and there are a lot of buyers for every type of loan without the supply.
We all have fallen into the trap of being totally engrossed in simply keeping up with the business when times are good. It’s when business falls off that we start sharpening our pencils. While having both a good business model and a fairly sustainable strategy is important, it’s even more important to be focused on continuous development all the time. I love the 80/20 rule, and I think it applies to your strategy as well. As senior lending executives, we should be focused on current service delivery and execution 80% of the time, and on strategic development 20% of the time.
CUES member Bill Vogeney is chief revenue officer and self-professed lending geek at $8.9 billion Ent Credit Union, Colorado Springs.