Lending Perspectives: The Value of a Well-Timed, Financially Sound or Mission-Driven ‘No’

extended hand no
Bill Vogeney Photo
Chief Revenue Officer
Ent Credit Union

8 minutes

A good strategy means you don’t have to say yes to every opportunity.

In the last year, a quote by Warren Buffett gained significant visibility in the field of business strategy. The Oracle of Omaha reportedly said, “The difference between successful people and really successful people is that really successful people say no to almost everything.”

To me, this was no surprise. After all, when I was working on my MBA at the University of Central Florida in 1996, Dr. Jeff Harrison, who taught the capstone course on strategic planning, started off the first class by stating, “The great thing about having a well-developed strategic plan is that it allows you to say no.” 

I remember Jeff very well and his words even better; what he said was a revelation to me. To my long-suffering peers at Ent, this partially explains why I am such a pain in the butt and question virtually everything, especially when someone says something like, “We have to do this.”

Thinking back on my career, I’ve said no to a lot of things. Sometimes, the opportunity didn’t make sense, or I just couldn’t understand it. One of my former CEOs here at Ent, Charles Emmer, liked to say about commercial lending, “If you can’t explain a loan in a one-page summary, you don’t understand the credit.” If you can’t reasonably understand a potential opportunity, maybe it’s a sign to lead with no.

So, what have I said no to over the years? Let me start with something fresh on everyone’s mind.

PPP or ‘Potential for Problems and Personnel (Burnout)’ Loans

The Paycheck Protection Program, administered by the U.S. Small Business Administration and part of Congress’ response to the COVID-19 pandemic in 2020, is a recent event that is a great example of when I had to say no for several reasons. First and foremost, Ent was not an approved SBA lender. The questions PPP brought up in my mind included: What did we have to do to get approved to be an SBA Lender? Could we be approved just to originate the PPP loans? How would we underwrite them? How could we keep up with the potential volume?

Trying to get answers to these questions, just as everyone (including the SBA) was shutting down their offices and trying to operate remotely, was impossible. Complicating the decision-making progress was the last question I had to answer: How could we keep up? After all, we had already designed our own relief programs, which included emergency loans (we granted over $45 million to our members), deferment and loan modification plans, including separate programs for our existing business relationships. Frankly, we were flooded for months. 

We had estimated we could get up to 5,000 requests for PPP loans, and frankly, we didn’t have the staff. In addition, I wasn’t going to tell everyone they had to work 60 or more hours a week to help us make PPP loans when stress levels were at an all-time high due to the pandemic and trying to work from home. 

Have I had second thoughts? In a word, no. 

Given the high level of fraud that occurred with the program and the poor communication from the SBA about it, I’ll never second guess that decision, which by the way, was popular with my key players before and after the fiasco. A decision had to be made and with conviction.

Auto Leases

Perhaps my jaundiced view of leasing comes from a bad experience I had when I leased a car at age 23. I didn’t default, I made all my payments, yet I realized the leasing process was all about meeting my payment requirements. All the other details, including what the real price of the car was (the capitalized cost), became a blur. The dealer probably made three times the profit on my lease as opposed to if I had tried to get a conventional loan. Since then, I’ve become much more knowledgeable about leasing; in fact, I can calculate a lease payment (or at least estimate it within a few dollars) in my head.

I’ve resisted the temptation to get into leasing for other reasons over the last three decades though. In auto leasing, the cream-of-the-crop borrowers go to the captive finance companies. After all, they’re controlled by the manufacturers. If the car makers want to “move metal,” they can throw a lot of money into the lease. They can lower the money factor (the embedded credit cost) to zero or rates well below a comparable loan. If they want to gamble on the future value of the car in two or three years, they can do so and increase the residual value, which lowers the payment. With leasing, the immediate cost to these strategies is very limited; if values plummet three years from now, they’ll worry about that later. From my perspective, we can’t compete.

What’s left in leasing where credit unions can compete? Longer-term leases, which can be financially risky for the consumer and the lender. A 48- or 60-month lease might amortize closer to a 96-month loan. The consumer might find it very difficult to get out of the lease early. And on the back end? A residual value that may be harder to predict, and more excessive wear and tear on the car that will require your credit union to go back to the member with a request to pay $XXX (or worse yet, $X,XXX) after they turn in the car. For the lender, we may be dealing with borrowers that are worse credit risks as well.

I think the transition from gas-powered cars to electric vehicles adds a lot of uncertainty to the residual value risk as well. A year ago, people were selling two- and three-year-old Teslas for more than they paid for them, collecting all the tax benefits and buying new ones. Today? The value of used EVs has fallen dramatically as the supply of new EVs has increased dramatically, courtesy of the manufacturers catching up on the craze. Yet, could the different kind of unexpected value decline scenario apply in a few years to gas-powered vehicles if we experience a spike in fuel prices caused by continued exploration for new oil reserves declining faster than the use of gasoline? Saying no to leasing now is a well-timed no.

Finally, it’s hard to compete with banks in the leasing world. Banks can depreciate leases on their books, creating tax value to being in the leasing business, which in turn will increase their net yield. For credit unions as tax-exempt financial cooperatives, there’s no such benefit. So why go through the process solely to take a lower yield, especially when competitively we can only hope to scrape the bottom of the barrel?

Pick a Payment Loans

Turn the clock back to 2005, and my chief lending officer Jon Paukovich and I had an opportunity. The now infamous pick-a-payment mortgage had taken hold of the market. In fact, we’ve since seen data that indicated in 2006, about 35% of the mortgages made in our market had this feature. Jon and I had recently been paired at a golf tournament with a mortgage originator from a national lender who bragged about making a boatload of these loans. We had to consider whether Ent should also enter this new line of business.

We had many concerns. Could the consumer understand what they were getting into? Was this a quality financial product (a fundamental component of our overall mission)? What about credit risk with a mortgage that not only didn’t amortize like an interest-only mortgage but could allow for the principal amount of the loan to increase to 125% of the original amount borrowed? Could the consumer handle the payment shock?

Making pick-a-payment loans could have been a great source of revenue, and we certainly could have sold these loans to various investors, effectively washing our hands after origination. Getting back to the value of a mission-driven “no,” the funny thing about doing “icky things” as a credit union is that the seemingly simple task of washing your hands really doesn’t get the “ick” off them. Jon and I decided we were not going to originate pick-a-payment loans, regardless of the potential income, increased market share and ability to offload the credit risk.

We all know what happened during and after the financial crisis. Those loans exploded and caused countless people to lose their homes. Going back to the credit union’s mission, for years I would occasionally address our new employees in orientation and give them an idea of what Ent was all about. I’m normally bad about conforming to someone else’s PowerPoint presentation, so I liked to tell little vignettes from my time with the company. The story of the pick-a-payment loan was always the one that got the most head nods. 

I also told new employees that almost a decade after the financial crisis, I still reviewed the foreclosure listings in the local paper. The reason? I wanted a weekly reminder of all the people who were in danger of losing their homes over pick-a-payment loans. 

Even though in 1988 I inherited a credit union loan portfolio of $110 million, and now oversee the strategic planning on another loan portfolio that exceeds $8 billion, I’ve said no a lot over the years; so much so, next month I’ll finish up my five-year-plus series of Lending Perspectives columns with the rest of my stories. Strategy never goes out of style, and arguably the need for a strategic plan that doesn’t chase the latest bright and shiny object is more critical than ever in today’s topsy-turvy environment.

Bill Vogeney is chief revenue officer and self-professed lending geek at $9.8 billion Ent Credit Union, Colorado Springs.

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