As the subprime lending crisis put an abrupt stop to the lending boom, banks were reminded that all good things come to an end. For industry veterans, however, ups and downs in the lending arena (though perhaps not to the recent extremes) are nothing new. But the industry often has a short memory -- when things are going well, it's hard to plan for the cyclical downturns of the lending business.
Now, of course, the latest phase of high-flying mortgage dealing has crashed back to earth. As a result, banks and other lenders are taking pause and regrouping. Yes, they must clean up the mess left by the credit crunch. But, after all, for every down cycle, there's a recovery, too, and lenders want to make sure they're ready with the right strategies and technology for the next upswing in the market.
According to Ira Sleasman, SVP with Las Vegas-based Bank of Nevada, part of Western Alliance Bancorp ($5 billion in assets), the industry is getting back to basics. "You're seeing greater qualification for applicants in terms of things such as their documented income and debt levels," he says. "We're approving loans that conform to prudent credit policy. So it's becoming a more conventional market, and so are the products."
The American Bankers Association's Doug Johnson, VP of risk management policy with the Washington-based organization, also points to a movement back to more conservative lending practices, as is the case whenever a down cycle occurs. "Banks are looking at their credit portfolios and making more-conservative credit decisions," he says. "That's pretty standard in this situation. It has been a while since we had a true business cycle. But that's the nature of the business, and it's a standard business cycle we're in. Banks are looking at their business and credit models and determining if they need to change the parameters of how they give credit. It's happening now, and it's having an effect."
One of the ways in which this change is manifesting itself is in banks' renewed interest in the tried-and-true five 'C's of credit: character, capacity, capital, collateral and conditions, according to Clark Abraham, marketing director with Cary, N.C.-based SAS. "These represent the foundation of credit granting, and I think the industry moved away from the basics and relied too much on their models. For example, you might have a model that looks for [a history of] bad loans because that's the easiest thing [to identify]. But that doesn't take into account the fact that a borrower might pay his bills in full and never defaults. Lenders have to start looking at the nuances of individuals."