End the Yes/No Game of 'Are You Lending?'

I am not sure it is even possible to quantify just how much bank lobbying dollars are being spent today trying to convince Capitol Hill that “banks are lending” – whatever that means.

This is not money well-spent. Firstly, it boils down a far more complex answer to the lending question to a "yes" or "no." It is like stopping the average person on the street and asking him, “Yes or no, are you healthy?” Does anyone truly know?

Second, it puts every bank into a branding nightmare. If the answer is “yes,” then every rejected application pockmarks the lender's brand. If the answer is “no,” well, then President Obama pockmarks the lender's brand. There's no win in this.

Here's my suggestion: rather than say “yes” or “no,” define the lending criteria, at least to some degree. “We lend to consumers with X credit score” or “we make loans to small businesses with three years of positive cash flow of $X or more.”

This approach has the added benefit of being straight with consumers. Besides, such sharing of underwriting criteria happens unofficially anyway. Is there a loan officer who does not do a quick, informal, back-of-the-envelope pre-approval of any potential loan applicant? Of course not. Why not embrace the idea – and show that you're different? At least, Obama can't bug you after.

Sure, there are downsides to this open-air approach. The most obvious one being competitive. Lenders are little more than their underwriting criteria and showing them to the world includes showing them to competitors. That assumes your competitor doesn't know your specs already – which is wishful thinking on the part of any bank executive. No, I think there is enough underwriting criteria that can be disclosed that will satisfy consumers, Capitol Hill and still preserve the secret sauce. Certainly, saving all those bank lobbying dollars should make it worthwhile, right?

Tags: brand, credit-score, lending, lobbying, marketing, underwriting

Comment by Tim_Cleveland on March 10, 2010 at 10:42am: The problem is that Congress, especially Barney Frank, seem to think that the Banks need to lend to anyone. They want them to continue to sins of that past that have gotten us to where we are. They think that the TARP money was money to be lent, not money to shore up capital for many banks that would not have enough capital to survive.

So let's say they laid it out:

We lend to people with 690 Credit scores or better. Do you think Barney and friends (the congressman, not the purple dinosaur) will not take this and say, "We think you shoudl lower that to 675?"

We lend to businesses with cash flow of $100,000 or more. They will say, why don't you average the last three years and ignore the fact that it is on a downward trend or perhaps that your market is saturated with your product and we doubt that this downward trend will stop.

Like insurance, there is a certain amount of "gut" in every underwriting decision you make and making blanket statements about points of underwriting will put you into a quandry when the person meets the stated criteria but the underwriter still has to say no for one reason or another. Whatthe banks are trying to avoid is the feds saying..Okay if the borrower meets criteria A, B and C, you MUST lend them the money. I think that we can end up just there is we let the peopel who propped up Fannie and Freddie for decades call the shots. And we will re-experience our history. You will also run the risk of them calling whatever standard you articulate as arbitrary or even prejudicial.

You just can;t win with these guys I am afraid.

Tim

Comment by William Fowler on March 10, 2010 at 2:36pm: Your statement is right on:
"Sure, there are downsides to this open-air approach. The most obvious one being competitive. Lenders are little more than their underwriting criteria and showing them to the world includes showing them to competitors. That assumes your competitor doesn't know your specs already – which is wishful thinking on the part of any bank executive. No, I think there is enough underwriting criteria that can be disclosed that will satisfy consumers, Capitol Hill and still preserve the secret sauce. Certainly, saving all those bank lobbying dollars should make it worthwhile, right?"

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Comment by Carl Selmasska on March 10, 2010 at 4:08pm: Tim,
You are certainly right about Congressmen Frank. How many people understand that it is Congressman Frank and other political leaders that are largely responsible for our current financial crises? Elected officials felt compelled to tamper with the "front lines" of capitalism, that being the "assessment of risk". Congress was allowed to breach those “front lines” with programs such as the Community Reinvestment Act and by the mismanagement of Fannie and Freddie and letting them both become nothing more than political piggybanks. However, I am buoyed by the elections in NJ, VA and of course MA. This nightmare will end with the November elections and a new Congress in January 2011.
Carl

Comment by JJ Hornblass on March 10, 2010 at 9:40pm: Tim & Carl,

I see your point, Tim. There will certainly be a bit of "then lower your minimum credit score." But the current predicament is worse. Now the populist response to lenders is, "you're not lending," and the logical response to that is "I am -- to people with a credit score of 620." Without a justification, lenders become political punching bags.

JJ