One of my favorite movies is Bull Durham, which takes a humorous look at life in minor league baseball.
One of my favorite scenes is when Nuke (Tim Robbins), a rookie pitcher with a “million dollar arm and a five-cent head,” takes the pitcher’s mound and announces he wants to “announce my presence with authority” by throwing a fastball.
The catcher, Crash Davis (Kevin Costner), replies that the hitter “is a first-ball, fastball hitter,” to which Nuke counters, “Well, he hasn’t seen my fastball.”
Of course, Crash tells the batter the fastball is coming and the hitter knocks it into the next county.
I have been a vice president of lending at two credit unions over a nearly 24-year period, so I figure I’ve been through 22 NCUA exams. I believe that, during the exam process, you must announce your presence with authority.
What does this means in the context of lending?
• Be prepared to sell your strategic lending plan to the examiner in charge, if necessary. This takes more than just saying, “well, our board of directors approved this new loan plan.”
More than ever, examiners are looking at more than just credit risk; they want to know about your business model, how you’ll build business, and how that makes sense for your credit union.
The days of a “me-too” strategy are over. Ten years ago, there were plenty of credit unions who said, “Well, if ABC credit union is making Centrix loans, I guess we should, too.”
Ultimately, your lending group should determine your strengths, weaknesses, opportunities, and threats—a basic SWAT analysis—to develop your own plan.
• Be well-prepared, mentally and organizationally, for the exam. Over the last couple of years—no surprise—there’s been a big emphasis on mortgage lending. I spend several months preparing our documentation and portfolio analysis before each exam, and it’s all well laid-out and ready for the examiner’s review.
I recall that in 2005, NCUA released a Risk Alert on Home Equity lending, which many credit unions ignored. At the time, in preparation for our next exam, I built a binder full of documentation-portfolio reports, memos to our senior management group, and ongoing monitoring reports.
The following year I added monitoring of our local real estate market along with an analysis of our real estate market’s affordability. And this was all before the bottom of the real estate market fell out.
• Roll with the punches. NCUA (or state examiners) exist to determine credit unions’ safety and soundness. They’re going to ask a lot of questions—some of which are designed to see how much you know and to compare your answers to a colleague at another credit union.
About 15 years ago, an examiner at my prior credit union asked me about risk-based lending and how we decisioned any particular “C” loan. A colleague at another credit union, the examiner explained, pointed to a FICO odds chart and said, “At a 640 level, 95% of the people will repay. That means I need to approve every one of these loans to be profitable. The 95% will make enough money to overcome the 5% who won’t pay.”
My response to the examiner telling me this story was a simple, “Not really.”
I explained the odds chart was just a summary of a validation of past loans—and the loans in that “C” tier certainly didn’t represent a 100% approval ratio across the industry.
Such questions are designed to be a challenge—so be prepared.
Regardless of any of these points, you can announce your authority all you want, but Nuke should have thrown a curve ball to that batter. If the examiner makes a reasonable finding, don’t waste time trying to argue the point. Agree and make the necessary changes—fast.
Some 20 years ago, the examiner in charge at my prior credit union was M.J. Coon, who’s now the CFO at my current credit union. During the exam she showed me one of our lending policies she didn’t particularly like.
Overall, our exam was a good one, and we had seen some significant improvement in our loan portfolio. We discussed her finding and I agreed with her.
Fifteen minutes later I returned with a draft of the new policy, which showed I was willing to accept criticism and make necessary changes. M.J. was suitably impressed.
Ever since then I’ve always found ways to develop good working relationships with our examiners—and yet make it clear that we have a well-thought-out business plan.