NEW YORK—The ever-growing compliance burden is chipping away at much-needed training for business loan officers, leading to a basic skills gap that could be hampering their ability to make loans.
A new study from Moody’s Analytics has found that lenders and underwriters are struggling to keep up with changing rules and regulations.
“There’s so much regulatory pressure coming down right now and there’s so much investment being made in changing policies, practices, systems, and infrastructure,” said Ari Lehavi, author of the report and executive director and global head of training and certification at Moody’s. “I’m seeing obviously some interest in training, but it occurred to me that I wasn’t sure if the level of investment in training and getting people up to speed is consistent with the extent of the changes and higher standards and expectations and scrutiny being introduced into the industry.”
Lehavi said the study was precipitated by a fear that there is little recognition that “there’s going to be people who are going to have to deal with the consequences of all these changes and up their standards and raise their skills to be able to comply with all of them.”
The paper, titled “People Risk: Improving Decision Making in Commercial Lending,” focuses on identifying the risks associated with inadequate skills, and while Lehavi’s report does not include credit unions, he said there are still plenty of takeaways for not-for-profit financial institutions.
“Credit unions are facing increasing regulatory scrutiny, more compliance, and there is likely to be some sort of expectation for a higher degree of skill and capability in light of those changes,” he said.
But, added Lehavi, “recognizing that credit unions have not had the same issues that the major banks have had during the financial crisis, one of the key lessons you saw from the paper is that it’s about the variance. There’s no blanket, easy statement about the industry. There are pockets that need to be addressed, and that’s probably true for credit unions as well.”
Recognizing that some credit unions may need to up their MBL game, some state leagues have partnered to offer an “MBL Boot Camp” to credit unions. Presented by the Cornerstone League—the joint league serving Texas, Oklahoma and Arkansas—in partnership with financial skills training firm Hipereon, the boot camp is a five-week program running for an hour each day, five days a week, once a week for five months.
“It has a major benefit and a major flaw,” said Bob Hogan, president of Hipereon and a lead facilitator for the boot camp. “The major benefit is the time to practice and internalize and use the skills and get the repetition it takes to actually master the skill. The downfall is that it takes time.”
Credit unions would be well advised to jump on the MBL train soon, added Hogan, because “the bigger institutions are now circling the wagons,” and if CUs aren’t ready to compete, they may lose that business.
Lehavi said that one of the study’s major surprises for him was that such a wide variety of gaps existed within individual institutions, and he said that’s a trend that likely also exists at credit unions—particularly large ones.
“Strengthening the industry and establishing more consistent standards of quality across the industry is probably a useful concept to introduce,” he said. “And if it’s done in an efficient and cost-effective way it could actually help support an entire industry.” Lehavi suggested that if those standards were introduced an industry body, such as one of the main CU trade groups, rather than by NCUA, the concept might be easier for CUs to swallow.
But the nation’s largest credit union, Navy FCU, doesn’t share those fears, having recently created a new position to focus specifically on commercial loan participations.
According to Jim Salmon, VP of business services at Navy Federal, the CU is currently averaging more than 1,200 new businesses month signing up for various services with the credit union. While business services have existed for more than 11 years there, establishing the new position was a way to bolster that program from “from a talent perspective and a focus perspective.”
Salmon said that compliance struggles haven’t been an issue for Navy’s MBL program. “There’s been a lot of tweaks and changes within SBA programs that we’ve had to stay on top of, but we haven’t experienced a ton of pain,” he said, quickly adding “I caveat that with I know that I’ve gotten a lot of support and help.”
Part of Navy’s strategy includes quarterly and annual training modules for employees, and as a result of that the credit union has been able to stay ahead of the curve, said Salmon.
But Hogan concurred with Lehavi’s fears.
“I can tell you that there’s just not the degree of training being conducted internally inside organizations today that there used to be,” he said. “Everybody perceives it as being a cost today. We don’t look at it as a cost, we look at it as an investment. We believe, especially in MBL training, that if you stop one small business form becoming a loss, you’ve paid for training for basically everybody in your credit union.”
Lehavi cautioned that because credit unions fared better during the credit crisis and have had fewer default rates, they may be at a heightened risk to assume that this isn’t an area that should be a major focus.
While credit unions don’t often make the same type of large-scale business loans as the major banks, Lehavi noted that many of the same principles apply for the small business lending done at credit unions, and “there may be gaps of knowledge in those areas.”
He pointed to the “Great Divide” among large and small credit unions and stressed that “to the extent that there’s a desire to try to influence more growth, training and education is conducive to that. A better understanding of the customer’s needs and the capabilities of aligning the needs of the [credit union and the member] can only support more customer acquisition.”
And, he added, the competitive pressure from the banks isn’t going to be easing up anytime soon.
“The banks are now going through their own issues of trying to expand and grow, [so] there’s going to be more competition from the banks, and the pressure to pitch against them and position yourself and gain customers and retain them, those are all reinforced by good training.”
Hogan said he believes MBLs will be a continued growth area for credit unions, especially because CUs are well positioned to capitalize on the trust members already place in them.
“Business owners want that personal touch,” he said. “One of the things credit unions have is that personal touch—much more so than the big financial institutions.” But, he said, with the banks coming back into this space, CUs may have to change how they recruit new business.
“Most credit unions don’t do it strategically,” he said. “What I mean by that is credit unions respond to what comes in the door, as opposed to going out and strategically seeking the size and type of business that we want to do. Profile your own database of the members you already have as opposed to going out of market via participations or whatever. We believe there’s enough diamonds in your own backyard that if you harvest your own diamond mine you’d blow through all of your MBL limits.”