Ongoing Business Loan Risk Monitoring Should Not Fall by the Wayside
That's the suggestion from Larry Middleman, president/CEO of CU Business Group, the Portland, Ore.-based business services CUSO with 295 credit unions in 36 states. Owned by eight corporate credit unions, CUBG has reviewed more than $1.5 billion in loans since its launch in 2002. Middleman acknowledged that monitoring the financial condition of everyone involved in a business loan should be a no-brainer.
"I hate to generalize, but in general, our industry needs to improve in risk monitoring," Middleman said. "Credit unions tend to follow with what they're used to. From my experience, there are only a handful of credit unions that are actively monitoring their loans."
The first step is understanding the intricacies and nuances of the business loan, a practice some credit unions are reluctant to do, Middleman said. Once that is accomplished, the next step is viewing the risk monitoring process along a timeline. The kickoff starts with looking at the borrower, the borrowing entity and other commitments from both parties. The latter can sometimes make or break a deal.
"Look at it globally. What do these borrowers have as commitments out there even before you begin to make the loan," Middleman said.
The initial due diligence of documenting the loan and asking for follow-up information and making sure the borrower understands that they should be ready and available to provide any additional details when asked doesn't stop once the loan is approved and processed, Middleman reminded.
Another essential step, especially in these economic times, is keeping in touch with the borrower and the major collateral holder behind the loan. Middleman said a simple telephone call, driving by the building on the way home from work or even going inside the business "can make a world of difference in spotting issues before they become problems."
"There are so many simple things can be done in the background that will yield tons of information," Middleman said.
Some credit unions make the mistake of sitting back and thinking they're fine with a low loan-to-value ratio, which can lull them into a false sense of security.
"The building never walks in and makes a payment. By the time you've used the building to pay off the loan, it's way too costly," Middleman said.
Using the timeline approach, setting up a tickler or reminders for pertinent dates may help credit unions remember that risk monitoring is an ongoing process. Middleman said an annual review is not frequent enough suggesting quarterly assessments as being more practical. Taking a look at credit reports for instance, a credit union can spot any changes that may have occurred over the last three months such as judgments or liens. One classic example of why risk monitoring shouldn't start on the annual review date can be seen with first payment defaults, he said. When a borrower fails to make a first payment, credit unions are immediately thrown into loan workout situations.
"Now you have to take the entire risk monitoring process and speed it up," Middleman said. "If you view the process on a timeline basis, there are things you do before the loan and after the loan. It's an ongoing process."