A Discussion of Outsourced Commercial Loan Underwriting.
We all remember the “good ole days” when the task of staffing a community bank’s credit department was challenging but predictable. The regional and money center banks turned out scores of capable, formally trained credit analysts that would eventually make their way to the community banks. However, like many other aspects of banking, the “downturn” changed the supply and demand dynamics of the credit analyst position.
Let’s first talk about demand. During this time the number of formal credit training programs was greatly reduced in response to bank consolidation, a steep decline in new lending transactions, and the prioritization of loan work-out and portfolio management needs. Although both the economy and lending opportunities have since improved, the training programs have not yet recovered.
When asked about the lack of analyst candidates, one hiring manager put it frankly, “Kids coming out of college just don’t want to work for banks”. Withholding judgement, the reasons are clear: 1) A perceived instability of banking careers as a result of the “downturn”; 2) A perception of lower earning potential in banking than in other finance and business-related careers; 3) Inflexible work hours and a lack of other “modern” workplace accommodations.
The result of these supply/demand inefficiencies result in talent deterioration and higher salary demands, a bad combination. Therefore, Banks have naturally taken a more cautious approach to hiring and have opted to stretch existing resources. Given heightened regulatory expectations and the previously exposed risks of lax credit administration practices, the cautious approach is not optimal.
Others have taken a more nuanced approach, seeking outsourced credit analysis solutions as is commonly accepted with internal audit, compliance support, and loan review functions. Although it may seem daunting to entrust the credit analysis function to an outside firm, these banks have identified arguable advantages. First of all, these advisory firms tend to staff professionals with a higher level of experience than is typically available to banks for similar positions. Also, the higher per/hour cost is typically offset by the “on demand” nature of the service.
The banking environment has seemingly changed more over the past decade than in the prior century. Yet, the community bank’s importance in the vitality of our economy is unarguable. Therefore, as with all other aspects banking, community banks must identify prudent ways to “change with the times”, all while maintaining their identity.