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Is tone of your loan policy keeping your community from getting back to business?

Be sure policy points don't frontload pessimism and negativity

While the U. S. economy is experiencing a recovery of sorts as measured by business loan demand, are bankers doing enough to "sell" credit? 

There are different ways of stimulating loan demand. What I'm speaking of here is making the process more user friendly to both borrowers and lenders.

This doesn't have to mean watering down credit principles or competing through the offering of more limber terms or conditions.

Several years ago I was invited to join the board of ACCION New Mexico, a business micro lender affiliated with ACCION International. Each ACCION unit is independent in terms of governance and resource generation. But all the affiliates share information, processes, and proven techniques to stimulate entrepreneurship within their local geographic areas.

In getting to know ACCION, I have my eyes opened on a couple of scores that you may find helpful in getting things going again in your community.

What do borrowers really want?

At my first meeting with ACCION New Mexico's CEO, I was skeptical of the ACCION idea that borrowers were relatively insensitive to the cost of credit.

Why would anyone borrow at 12%, say, when the prime rate is 8%, was my question? 

I have to admit today that I was asking the wrong question and I learned a basic lesson: Borrowers will pay for access to credit but also for the context of understanding that is larger than just the loan amount and terms. It's a matter of finding a lender that is empathetic and concerned. One who treats the borrower in a more holistic way than most bank lenders seem willing or consistently capable of doing.

ACCION's clients are as cost-sensitive as any consumer but they have a sense of what they need and ACCION has a way of delivering value across an array of issues and obstacles.

1. One need is the availability of credit in the first place.

Most borrowers simply won't be considered by banks due to lack of credit history and the small size of the credit request. ACCION does a big business in micro lending. Although ACCION makes loans up to several thousand dollars, most banks do not offer business loans in the $500-$1,000 range for cost reasons.

2. A network of success stories on a small scale.

ACCION NM has a network of clients and former clients who are available to share stories and give encouragement to small business operators. I'd like to think it's what banks would do if it could be done on micro loan situations in a cost effective way.

3. A sympathetic ear for those with a need to speak.

ACCION staff members tend to be among the best listeners as providers of small business credit. Clients can tell the difference between the real article and an attempt at superficial concern and salesmanship.

Here's an important observation for all community bankers who are truly active as small business lenders. Often the principal difference between your bank and an ACCION is likely to be deal size in terms of what the customer wants and your ability to respond.

I understand that cost constraints make it difficult to fund microloans and that fair lending examination techniques may make it "hazardous" to charge compensatory rates and not run afoul of "disparate treatment" hunts.

But strip out the regulatory issues and the economics of size and you've got a good picture of what the small business lending market should look like in terms of a lender responding to a valid borrowing request.

A step beyond, digging into policy

There's more to the story, though. And maybe it's something that you can take a look at and tweak to some degree within your local banking environment.

Is your loan policy oriented toward how to do a deal or how to decline a deal? 

Does it help the policy's reader--you and your lenders--figure out how to make a proposed deal work? (Or how to simplify the process of saying no?)  

You may not appreciate the subtlety of this question.

I suggest that you reread your lending policy. View it from the perspective of the small business borrower.

I'm not necessarily talking about micro-level deals but rather the smaller size end of the market that you are able to address.

I make this suggestion based on my own experience.

Not long after joining ACCION NM's board, the CEO invited me to participate in a discussion with some of the lending staff and a couple of outside directors who were on the loan committee. Our objective of that meeting was: 1. to make sure that the policy was clear on the lending standards while 2. encouraging an optimistic frame of mind in the evaluation of applicant's creditworthiness.

I had written several loan policies by that point in my career and run a commercial lending training program where one of the basic propositions or challenges to the participants was "Don't say no, say how."

About halfway through some comments I was making on the then current ACCION loan policy, one of the outside directors, a borrowing client who was one of ACCION's first funded loans, said, "I know what you're doing. You're selling money."

That was a revelation to me and to the staffers at that meeting. And it was true. I was suggesting ways of rephrasing credit standards more in terms of opportunities than obstacles.

Many bank loan policies have subtle messages and overtones that are easily understood as hurdles to clear rather than standards to meet that might be satisfied in more than one way.

Loan policies are often tutorial types of documents and end up as part procedures manuals and part policy statements. The procedural parts are almost always rules-driven. But as necessary as the rules are, they collectively tend to be negative or at least are often perceived that way. Try to keep policy statements free of procedures.

Turning policies into sales tools

If you want to sell more credit, why not work on making the lending policy a document that's more inviting than intimidating? 

If your policy really is where to find the acceptable credit standards of the bank, set them out as positive standards rather than couched negative prohibitions.

For instance, most policies set out acceptable advance ratios on negotiable collateral. I remember a lengthy discussion years ago about the appropriate advance ratio on New York Stock Exchange listed securities. Most participants thought that a 70% advance ratio to market was appropriate but there were a few credit "hawks" (generally loan review or credit administration people) who argued that a lower advance ratio was always better than a higher one.

The senior lending officer pointed out that the advance ratio could speak volumes to whether the bank wanted to make some deals at a reasonable advance rate or stifle that sort of lending altogether.

I'm quite convinced that the hawks didn't understand the point.

But the rest of us who were trying to build loan business certainly did.

I have found that this sort of thinking--stimulating or discouraging business--by explicitly stating a bias in such things as advance ratios is alive and well.

After the bruising few years we as an industry have endured, I'm not advocating any particular ratio or a liberal or a conservative view point. I'm simply stating that in my many years in the business, loan policies send some subtle and some not so subtle messages to the readers and keepers of the bank's credit standards.

What sort of message are you sending? And is it the one you want to send in this environment of anemic loan demand?

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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