Commercial Lending: Tune-Up or Junkyard?
The commercial lending environment at most banks has evolved to a point somewhere between the Dark Ages and Henry Ford’s Model T. Hey bankers – isn’t commercial lending your greatest revenue producing engine? So why do we seem to be going backward instead of forward?
But all is not lost. The GonzoBanker Commercial Lending Self-Assessment Checklist is here to help bankers identify the evolutionary status of their commercial lending production engines and determine whether this year’s budget should factor in a tune-up, an overhaul or a completely new machine.
To begin, simply answer Yes or No to the following questions.
| Yes | No | ||
|---|---|---|---|
| Excel Spreadsheets | Do you have more Excel spreadsheets than Carter has pills? | ||
| Forms | Do you have a separate form for each function needed while originating a loan (Call Reports, Spreading, Appraisal Request, Doc Prep Request, Booking/Funding Request, etc.)? | ||
| Checkers | Do you have checkers checking checkers to ensure compliance with regulatory requirements and loan policy? | ||
| Frustration | Do your front and back offices have an intense negative attitude toward each other? | ||
| CRM Integration | Do you have to re-enter information already in your CRM system to originate a loan? | ||
| Sales Activity | Do loan officers spend less than 20% of their time bringing in new business? | ||
| Opportunities | Are you losing opportunities because it takes too long to get a letter of interest (LOI), term sheet or commitment letter to a prospective borrower? | ||
| Shadow Files | Are documents copied, copied, scanned, printed, scanned, printed, stored on the G: Drive, filed in the loan officers and loan assistants file drawers, attached and archived with Outlook e-mails, inserted into a loan origination folder, delivered via intra-office mail, and scanned into your archival system? | ||
| Redundant Entry | Is data entered more than once? | ||
| Regulator Exceptions | Are regulators saying you have a problem? | ||
| Manual Workflow | Does your workflow consist of Outlook or the top of a lateral filing cabinet? | ||
| Visibility | Do people complain that they dont know the status of a loan or service request? | ||
| Service Level Agreements | Are your service level agreements managed in real time, or are they reported a month later? | ||
| Standards | Does each office have its own standards for underwriting and creation of a loan approval request document? | ||
| Ticklers | Do you have separate systems for management and tracking of covenants, collateral, policy exceptions and document exceptions? | ||
| TOTAL |
Now, add up the checkmarks in the Yes column. Locate your score and the recommended fix in the table below.
| Score | Solution |
|---|---|
| 0-3 | Tune-up |
| 4-8 | Overhaul |
| 9-11 | New Engine |
| 12+ | Consider selling your horse and buggy and buying a car |
If you were fortunate enough to score in the Tune-up range, congratulations – you’ll be cleaning the least amount of dirt from under your fingernails. As for everyone else, there’s a lot of work ahead if you want to build a commercial lending environment that purrs like a kitten! We recommend taking the following into consideration as part of the process.
VENDOR CONSIDERATIONS
Unless you have already made an investment in a commercial loan origination system, your score says you need help. You may think you can build your own CLOS, but GonzoBankers – don’t do it! Commercial loans are much too complicated, have too many variables for defining structure, and are fraught with exceptions. Plus, you need it now – not five years from now.
Plenty of vendors are capable of moving you forward. The number of vendors and disruptors has increased dramatically in the CLOS space. Today there are more than a dozen vendors banks could consider, with capabilities and price tags ranging from a Nissan Versa to a custom-built Porche 918 Spyder. Before buying, though, there are some factors you need to take into account.
Acquisitions/Alliances
After a period of sparse sales, vendors have been jockeying for position to capture your business. Meanwhile, a significant number of acquisitions, alliances and investments have occurred in the last few years. Here are a few examples of the rapidly shifting landscape:
- Moody’s announced the acquisition of WebEquity on June 10. Moody’s now offers WebEquity and its internally developed Risk Origins solution.
- Custom Credit Systems and SunGard formed a marketing alliance late 2011.
- D+H, with the acquisition of Harland Financial Solutions, now offers both CreditQuest and CreditPath.
- Wolters Kluwer expanded its product line with the acquisition of Financial Tools.
- Vanguard Software Group ended its agreement to offer LoanVantage through FIS last year and is now offering its solution separately.
- WiPro/Gallagher, which has been primarily a mortgage loan origination system provider, expanded into the CLOS market.
- LineData, a French company, acquired Capital Stream last year from HCL, an Indian company.
- FIS formed a new alliance offering another third party CLOS solution in combination with its FLO product.
- nCino, a relatively new entrant into the market, has been receiving significant infusions of venture capital; including a $10 million investment in February.
Because these events can have both positive and negative impacts on the solution you might choose, asking a few key questions will help you determine what these changes may mean to your organization:
- Will this add to the capabilities offered?
- Will this product survive or will it be replaced?
- Are there differences in cultures between organizations and what will the impact be?
- Will the organization maintain management autonomy?
- How will this influence or impact the direction of the organization and/or product?
SOLUTION CONSIDERATIONS
In addition to evaluating the vendor landscape, there are other decisions and trade-offs you will need to consider.
Best-of-Breed or Integrated?
A debate continues as to whether it is better to purchase best-of-breed point solutions or compromise with a more integrated, broader-based solution. Two point solutions, for example, that are prevalent in commercial lending are LaserPro for DocPrep (with which most CLOS solutions have integration capabilities) and some type of financial spreading tool. The key consideration is overall value. In my opinion, a solution that meets 80%–90% of needs and is integrated for a seamless flow of data and transactions trumps little integration with 100% functionality.
Having said that, many of the integrated CLOS solutions do not offer all that may be needed, and a point solution may be an appropriate add-on. For example, many of the CLOS solutions do not offer construction budget and draw management. A point solution to address this makes sense.
Key Functional Capabilities
What feature functions should you consider as key to your success?
- Core Integration – The CLOS should be integrated with the core solution. Depending on the level of integration, the CLOS can prefill entity information and calculate aggregate exposure and deposit balances.
- Integrated Loan Approval Request – In most current environments, the loan approval request (LAR) document is completed in Word or Excel. Information captured in these documents is in narrative format and unusable for other loan functions. The CLOS should provide the ability to capture both narrative sections and loan details in structured formats that are then used to create the LAR. This same data should also feed other functions such as DocPrep. Vendors vary in the level of detail that is captured as data versus narrative.
- Integrated Spreading – Consideration should be given to the presence and level of spreading capabilities and integration. Capabilities vary in terms of global cash flows, consolidations, pro formas and projections, operating statement analysis and net operating income (NOI) calculations. Top level integration provides the ability to fully embed spreads, establish covenants and reflect them in both the LAR and a tickler system.
- Integrated Requirements Management – Manual checklists to ensure compliance with both regulatory requirements and loan policies abound. Your checkers and checkers checking your checkers use these tools and slow the process down. CLOS capabilities range from the creation of electronic checklists, which are updated, viewed or shared by all stakeholders, to CLOS that automatically generate requirements based on product, entities and collateral and enforce rules relative to submission of “complete packages.”
- Workflow – All CLOS vendors state that workflow is part of their solutions. However, workflow definition and true functionality varies widely from vendor to vendor. For some, workflow merely consists of having the ability to indicate what predefined stage (e.g., Application, Underwriting, Approval) an application is at. Others provide detailed management of tasks, assignments, service level agreements and dashboards for real time monitoring.
A bank’s situation, size, growth plans and need to scale, product offerings, efficiency goals, risk tolerance and budget will all impact its performance demands. The question is this: what does the institution need today? Will a tune-up do the trick, or is it time to trade in the current model and acquire the power of an engine capable of competing in today’s commercial lending world?
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Bankers, start your engines (if you can)!
Whether your GonzoBanker Commercial Lending Self-Assessment Checklist revealed a need for a tune-up or an overhaul, Cornerstone Advisors can help your institution get where it needs to be to operate at maximum performance levels.
A Cornerstone Technology Assessment will help identify the return on your institution’s technology investments. And, if new or complementary solutions are in your technology future, we can assist in the selection of new systems and help you save big bucks on your contract negotiations.
Contact us today to learn more.
