Lending Perspectives: Last Words on the Value of ‘No’

In my penultimate column, “Lending Perspectives: The Value of a Well-Timed, Financially Sound or Mission-Driven ‘No,’” I wrote about the value of saying “no” to opportunity—and three key things I’ve said no to over the course of my career: Paycheck Protection Program loans, auto leases and pick-a-payment loans.

In this, my final regular “Lending Perspectives” column, I share some insights related to saying no to a lending opportunity. 

When You Say No, Have a ‘Plan B’

A few months ago, I focused the Lending Perspectives column on having to say no to loosening your lending policy. It’s a real challenge that credit union lenders are pretty likely to face over the course of their careers. 

I faced it myself. In the mid-90s, my prior employer watched as another credit union in the state grew its assets and loan portfolio by 25% to 30% a year. I was under a lot of pressure to match, line-for-line, this other credit union’s playbook.

Some of the other credit union’s tactics were fairly easy to discern. It had started the first indirect lending program in the state. Even though in my finance company days (a whole other set of stories!) I had a lot of experience in doing other types of vendor financing—typically for smaller-ticket items—my prior credit union had zero experience in indirect. Efforts to build dealer and auto broker relationships hadn’t ended well either. Whether it was members taken advantage of by excessive dealer markups or, as I mentioned a few months ago, the fact we found the loan volume to be somewhat akin to a drug we had difficulty kicking, I didn’t think an indirect lending program was something we could rush to market.

The other credit union was also very aggressive on loan rates—a full 100 basis points under what we were offering on auto loans. I knew what we were charging, and what we needed to charge to generate a reasonable return on assets. They weren’t shy about advertising those rates, and trust me, their ads in the newspaper were cut out more than once and shown to me.

What wasn’t so transparent was their credit policy. I needed to do some serious research, so I talked to several of the auto dealers doing business with them. Bad news: Not only were they giving their money away through low rates, but also through loose credit standards. FICO scores were just starting to be commonly used, but it didn’t take a statistical model to see their typical borrowers were not very creditworthy. To put the proverbial icing on the cake, this also happened at a time when risk-based lending and pricing was not common for credit unions. They were taking the risk, but not getting paid for it.

As I alluded to in the previous article, the pressure on me to implement similar tactics was such that I thought I was going to be fired over my constant “no.” Were they well-timed no’s? Probably not—because I’m not sure “no” was what the boss wanted to hear. I sure was consistent, though! Was my no financially sound? Sure, I did the analysis and showed the impact of charging below-market rates. Unlike the old joke, sometimes you can’t make up for low prices with volume. I also reminded my boss that the credit union had gone through several years of difficulties because of a problem loan portfolio I inherited when I came on board, and I didn’t want to see that happen again. 

Mission-driven? Over the last 35 years, finding a way to remain reasonably consistent in lending criteria also meant that my credit unions could be consistent in service to members. I’ve seen too many credit unions underestimate the financial impact of loosening standards, which causes them to eventually focus more on fixing their portfolios than continuing to lend in the manner their members deserve. That certainly happened to our competitor credit union. Losses exploded, key executives lost their jobs, and the credit union didn’t grow for three to four years.

As an aside, all the financially sound “no’s” in this story would not have saved my career by themselves. I think I kept my job (I don’t think I’m being overly dramatic on this point) because I had an alternative plan. We would continue to grow based on a different set of concepts. Strong cross-selling efforts. Improved loan origination capabilities at our branches, specifically those newer, smaller or underperforming branches. A focused effort to find ways to intelligently take on some additional credit risk, focused on the member relationship and finding good people with bad credit. The lesson to be learned? Find a way to say no, but have a plan B.

Sometimes, ‘No’ Just Won’t Cut It

Notably, there are times when you just can’t say no. I’ll turn back the clock to the summer of 2000. I had just attended a week-long credit union school on business lending. I had learned a lot, but still sensed there was a lot I didn’t know. My prior credit union had talked about getting into business lending, and in a few weeks, the board and management would conduct their annual strategic planning session. High on the list of topics? Member business lending—and I shared some of the ins and outs I had learned during the session.

All went well over the long weekend, with the board giving us the thumbs up to proceed—until that following Monday morning. The CEO surprised me with a call to action: We would be ready to make member business loans on Nov. 1 of that year, a mere 77 days away. I had no procedures, no policy, no forms, no knowledge of what our core system could support, and more importantly, no staff. After 12 years there, I knew what I could and couldn’t do, and what I couldn’t do was say “no,” not even “no, but…”

So what did I do? I pulled myself up by the bootstraps and became very entrepreneurial. Sometimes you need to just make things happen. I wrote the policy and procedures. I tracked down loan documents. I kept things simple. I hired a lender who had a lot of experience. It was a good lesson learned. After several major initiatives launched over the years that took a lot of ironing out, I had become methodical. I wanted to get things “right” the first time, and my boss was well-aware of my tendencies, so he threw down the gauntlet with the 77-day challenge.

If you can’t say no, and you are concerned about long-term ramifications, the key is to not stick your head in the sand. Don’t set it and forget it. Constant monitoring, follow-up, and improvement is the key. 

So, what happened with the 77-day member business loan program? Shortly after implementation, I wound up having to fire the commercial loan officer I had hired to start the program. The problem? On one of the first loans he brought to our loan committee, he had identified the collateral being purchased as an “office condo.” He also assured us he had driven by and seen the property—except I recognized the address as a part of town that I wasn’t sure was commercial in nature. After the committee discussed the loan and tentatively approved it, I decided to take a little drive. The property turned out to be a very run-down single-family house. My lender had lied. Constant monitoring is critical.

Goodbye, Friends

As painful as it is to admit, this will be my last monthly Lending Perspectives article. I have tried to find a peer in the credit union movement to take over this column with no luck. I am rapidly approaching retirement with a lot on my plate I want to accomplish. Over the last few years, I have found that having the passion for what I do to be significantly tougher to maintain at the level I believe my credit union deserves. I’ll fashionably blame this on COVID-19 and all the issues it created for us in lending: out-of-control mortgage demand, helping members handle a crisis situation and the challenges of managing a remote workforce among them.

To keep myself going in 2021 in a manner only I’d fashion, I started listing rules on my whiteboard. My rules, for me, to keep me focused and level-headed. My first one was “No whining” because I had found myself complaining about things I couldn’t control. My last and most important rule is “Don’t be a distraction, and don’t be distracted.”

As I said, I have things I want to accomplish in a fairly short time window and don’t want to be distracted by writing. I have been incredibly blessed to be able to carve out a few hours every month for the last five-plus years to write for CUES (see the full collection here!), yet I really need every hour I have right now. 

Thanks for reading, and thanks for a few kind words that have encouraged me to keep writing over the years. 

For anyone who thinks they want to stick their neck out and write about trends in lending, my editor, Lisa Hochgraf, has been amazing. I wholeheartedly recommend her to anyone who thinks they need what I’ve told Lisa she has been to me during this time: a gentle reader. As I’ve joked in a few past articles, I love obscure movie lines, and the “gentle reader” reference comes from a movie line. Serious bonus points if you know the movie. 

Bill Vogeney is chief revenue officer for $9.8 billion Ent Credit Union, Colorado Springs. He’d like it if you could geek out over lending and write about the challenges we all face on a daily basis. If you’re interested, email his editor.