Top 5 Reasons Loan Officers Fail | Avoid the pitfalls. By Joshua Conklin

Top 5 reasons loan officers fail How to succeed and avoid failure How to train new loan officers for success How to provide ample leads to your loan officers to boost monthly funding volume as well and Loan Officers moral.

Henderson, NV (prHWY.com) November 19, 2012 - --- Top 5 Reasons Loan Officers Fail ---

Sales Lead Guru Josh Conklin at mortgageleads.org

1. No Referral Relationships/Partners

What actions are you taking to create new, or strengthen existing relationships?

2. No Credibility

Consumers and referral sources want to work with knowledgeable and reputable originators - clue, product knowledgeable is number one.

3. Failure to Prospect on a Regular Basis

You will be more likely to succeed if you have the "right" marketing plan, backed with "action."

4. Lack of Sales Skills

90% of all mortgage originators have no "system for selling." They are at the mercy of the buyer's system for buying, or not buying.

5. No Database Marketing Strategy

Top producing originators have large databases of past, current, and future clients.

Two questions have plagued bankers for years, how to train bankers, and how to have

them use the skills that they have been given through the training.

Different Banks Have Different Needs

Officers are trained and developed in banks according to how their banks plan to ask

them to pursue their jobs. At one end of the spectrum, the relationship manager is a full

service banker. This banker calls on the customer, solicits business, analyzes credit,

negotiates agreements, monitors progress, and may even become the workout officer,

should the need arise. At the other end of the spectrum, the banks have fragmented the

job, creating a series of specialists to handle the needs of a complex banking relationship

with the corporate customer. We sometimes hear the phrase: "finders, minders, and

grinders" referring to the various job categories in this type of organization.

Both types of banking organizations are subject to periodic bad loans, as the business

cycle intermittently punishes the business community for collective overcapacity. When

the cycle causes bad loans to rise quickly, senior bankers are always surprised at how

unprepared the cadre of younger bankers are to deal with the pressures of a rapid decline

in both cash flow and collateral values in their customer base. What they frequently

witness is less experienced bankers lapsing into disbelief at these declines.

Unfortunately, some banks witness something like a thermal inversion among the

bankers: the younger bankers fall into denial, while the older ones are trying to snap them

out of it. This bogs down the necessary process for recovery. What is needed is rapid

action to determine the damage in the portfolio, and to identify accounts where timely

and decisive action can save the bank's resources and reputation.

However, the denial and the infighting over credit quality, and the clash of officers

hoping that "things will get better" with credit decision makers convinced that many of

the accounts must be written off, frequently get in the way of progress. One helpful

safety valve in many banks is the practice of shifting workout loans to a special unit,

away from the protective influence of those who wrote the loans. This helps to remove

the conflict that arises due to pride of authorship and to career protection reflexes that

obstruct the necessary objectivity that workout decision makers should exercise. Yet,

depending on how the bank is organized, interdepartmental profit and loss statements and

incentives may get in the way of early identification and action.

The big questions are: (1) What causes delays in recognition of bad loans and starting to

work them out? (2) Why are young account officers so unaware of the reality of bad

loans? (3) What can be done to prevent it?

(1) What causes delays in recognition of bad loans and starting to work them out?

There is no simple answer to this question. The problem comes from the interaction of a

number of factors, some structural, and some individual. However, the central theme is

that any stigma attached to bad loans will serve as a disincentive to recognize a loan as

"bad" until all local remedies have been exhausted. In an organization where account

officers individually cover all of the bases, a bad loan may be reckoned to be an

individual failing. After all, the account officer "was responsible" for all aspects of the

loan, so when it goes bad, the officer is an easy target for criticism. This may occur even

when bad loans abound in the economy. It is still the individual officer's loan that has

gone sour. This system gives strong incentive for officers to deny problems in their

portfolio. Nothing (that I can't fix) is going on in the portfolio. Requests for more money

by ailing borrowers are championed for too long by officers in this type of system,

because it prolongs the uncertainty, and pushes out the day of reckoning. Better training

and education regarding when to call independent advisors may help.

Experienced and confident officers in such a system may have no problem in signaling

problems and moving ahead with appropriate solutions. However, the officer must have

a storehouse of organizational credibility, before even he or she can be that objective.

Experience is often an expensive way to learn.

At the other end of the structural spectrum, in the land of the minders, finders, and

grinders, there is a whole roster of names connected with each credit. In fact, there are so

many names that officers can fall into the "blame game" deftly tagging everyone but

themselves with any responsibility for having "made the bad loan." Because this personal

safety valve may be too easy to activate, there may be no one with adequate incentive to

focus on the flagging borrower's problems and start the right processes within the bank.

Apart from the structure of the account officer function within the bank, the accounting

treatment of loans can have an impact on the workout process. If workout accounts are

shifted to a separate unit, what happens to the profit/loss from that account? When the

P&L impact stays with the originating group, they will be motivated to make good loans,

but not necessarily to transfer bad loans to the workout section, where they can no longer

manage the cost of contact with the customer.

Finally, it is worth making a comment about the real ability of an individual account

officer to avoid making bad loans. Most any senior credit officer of a bank will agree

that a portfolio with no bad loans is a sign of missed opportunity. Banking is a business

that makes its money by accepting prudent business risk. In an economy that fluctuates,

the normal expectation is that there will be some percentage of loans in the portfolio that

go bad. While it is clearly in the bank's interest to minimize the losses for a given

portfolio, Tightening the risk parameters too tightly cuts off more profit than risk. (An

analogy is a city government trying to wipe out crime. For a reasonable cost it can

reduce crime, but wiping out the last vestiges of crime are more expensive in the

aggregate than picking up the pieces and repairing the damage of the crime that goes

unprevented.)

A realistic, but uncommon way to understand the job of the bank account officer (or

lending team as a whole) is as follows: The account officers can perform credit analysis

on the individual loans and customers in the portfolio. However, they are analyzing the

risk, and not predicting the outcome of the individual loans. Management may elect to

lend at a level of risk where a certain "X%" of the loans will go bad during the next

business downturn. The account officers may be able to predict which loans might have

a higher risk of failing, but they still will fall short of picking which individual loans will

go bad. Indeed, if they could do that, they would not make those loans, and there would

be no risk. Unfortunately, it is convenient for management to ignore this truth about

lending, and blame the account officers for individual failings. This takes heat of the

management decision to accept the aggregate "X%" losses. Explaining that to the board

can be uncomfortable compared with explaining the failings of the account officers. Yet

all boards understand that some normal level of losses will occur. The issue is having

everyone educated so as not to throw good money after bad.

(2) Why are young account officers so unaware of the reality of bad loans?

Younger officers are frequently frustrated at the resistance they encounter when trying to

push for the acceptance of "creative loans." This is often symptomatic of the lack of

experience of the younger officer colliding with the matured judgment of the older and

more experienced credit decision makers. The credit officers, though have arrived at this

stage because they have witnessed the melt down of collateral values and widespread

business failures that can plague an entire industry when a recessionary downturn occurs.

Let us look at the part of this problem that the account officers bring on themselves.

Account officers (whether individual or as members of various lending team activities)

are responsible for determining the cash flow and debt capacity of the borrower, and also

for structuring the debt to minimize the bank's loss potential. These are both areas that

call for judgment and experience. For decades, banks have tried to systematize these two

areas of judgment, to eliminate errors. However, the adaptability of corporations, the

shifting value of collateral, and the changing nature of markets has continued to defy

these efforts.

Let's take these issues one at a time. Cash flow analysis is only as good as the data that

goes into it. In the past several years, we have seen that artful CFOs can warp their

presentation of historic cash flow through creative accounting, a number that was

previously thought to be immune to tampering. Further, the process of determining debt

capacity relies on predicting cash flow, which relies on assumptions about the future.

Even the brightest and most analytical account officer will have to be a veteran of many

cash flow predictions before gaining an understanding of their ability to disappoint.

Mechanical sensitivity testing can be done on assumptions, but a matured sense of which

variables might move together, and just how far they might move is critical for doing it

well. It takes years to develop experience in judging cash flow projections, the

"personalities" of the managers that produce them, and the characteristic patterns of more

than one industry.

Loan structure is part of the competitive arena that bankers must learn to play in. If a

customer does not like the offered loan structure, it may be that a competing bank will

offer one more conducive to the tastes of the borrower, and the bank may lose a viable

customer. "Vanilla" structures become more and more difficult to negotiate, as

borrowers connect with each other and learn about the newest twists that they are able to

negotiate in the market. New account officers introduced into this process may be

unequipped to analyze the impact of the various covenants and structural nuances of the

agreements. They often make assumptions that are not well connected with reality,

primarily because they have not seen the collapse of such agreements when the business

downturn hits. The same trap lies in collateral valuation. Newer account officers are

more likely to opt for "going concern" types of valuations of collateral, ignoring or

arguing against even looking at liquidation values. Again, officers who have been

through a recession have probably seen collateral values dramatically melt down in some

market, and are more likely to be skeptical. The skeptical banker looks more diligently

for alternative sources of repayment and mechanisms for protection. The skepticism

makes competing more difficult, as other banks may be willing to ignore some of the

fundamentals, but it pays off in better control over losses going forward.

(2) What can be done about the problems?

We started with a simple problem: How can we educate new officers to prevent them

from making old mistakes? But, along the way, we find that it is not simply a new officer

problem. The outcomes result from the new account officers working within flawed

systems. To get to the root of the problem, we need to prescribe medicine for both the

front line officer and bank management.

Let's start at the top. Banks generally want to recruit and retain high quality bank

officers. Hold them accountable for what they can control and give them an atmosphere

where professional development includes learning, which allows the officer to make

mistakes. (Build in processes that avoid big mistakes.).

Principle # 1: Do not stigmatize

officers with bad loans, unless there is a specific error that is found in what the officer did

in making the loan. Bad documents, or bad fundamental analysis may mean bad account

officers. Bad loans do not necessarily mean bad account officers. Take the management

time to distinguish, and then be clear about who is being put in the penalty box, and why.

A critical issue for banks facing workouts is getting the bad news to the top of the bank as

quickly as possible, while there may be time for bank decisions to materially affect the

outcome. Strong adherence to the bank's loan rating system can be a help in this area, but

it is the changes in loan ratings that are important in identifying problems.

Principle #2:

Changes in loan ratings need to be singled out and brought to the attention of senior

management early.

Principle #3:

The cure in the account officer ranks is in training the pre-recession banker

to think like a post-recession banker. Trust, but verify. The tremendous growth in asset

based lending is a good example of "trust but verify." Monthly collateral audits help to

Copyright 2005, Board Resources, Division of Teamwork Technologies, Inc.

ensure vigilance and may reduce the "temptation" for more creative accounting. The use

of third party professionals may be helpful in spotting more than changes in collateral.

Account officers should be taught: Be objective. Don't let pride of authorship of a loan

structure impede your ability to see when the customer can no longer live with the

covenants. Do sensitivity analysis with meaningful changes in variables. Ask the really

tough questions. Compare the business resiliency of the prospective borrower with

others in the portfolio. Ask, is this really a loan that belongs at this risk rating, or should

it be rated worse, and hence structured more conservatively?

Principle #4: Teach

bankers to understand and identify the factors that "precede" change in loan ratings.

Factors that Precede Financial Indicators and Loan Rating Declines 

Ineffective management



Leaders without a realistic vision or plan



Industry decline or shocks



Quality problems



Reputation issues



Aggressive or new competitors



Operational problems



Growth of a low return business



High management turnover



Complex financial structure



Unproven business model



Conflicts within management/ownership group



Weak accounting systems

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