Classic Credit Cultures

Seven habits for highly effective loan committees

By Ancin Cooley and Regan Camp

Some books tell timeless stories. While many involve children’s stories with moral life messages, some enduring books can be found on business shelves. One such classic is Stephen Covey’s The 7 Habits of Highly Effective People. Among its pages, readers can find a plethora of useful advice for one’s business and personal life, with one major point of advice being the effectiveness of applying all of the book’s habits altogether.

There, Covey highlights the fable of the goose and the golden egg, stating many people incorrectly believe that the more they do and the more they produce, the more effective they are. Real effectiveness, however, is measured in how a person balances his or her production capability with his or her actual desired results.

The same premise should hold true for lending institutions. Moreover, as loan committees oversee lending and credit risk management strategies of lending institutions, their members should hone key habits that help them not only perform their duties with ease and confidence, but also help their institutions to obtain the ideal mix of risk and reward.

By consistently following the following seven habits in the spirit of your community bank’s policies and procedures, your bank’s loan committee can substantially improve your bank’s credit risk position. Those key habits include:

1. understanding purpose,
2. creating a diverse membership mix,
3. effectively communicating the message,
4. taking minutes that matter,
5. obtaining the right information,
6. asking the right questions and
7. maintaining a safe and sound credit culture.

Let us examine each of these habits in greater detail for the contribution each may offer in your bank’s pursuit of overall lending effectiveness.

Understanding purpose. Certainly, in any environment, it is essential to both define and understand purpose. Here, then, having a sufficiently sound policy regarding the management of credit is—or at least should be—a primary prerequisite for establishing a lending institution’s credit culture. As a best practice, a loan committee should know its purpose, objectives and key responsibilities. Absent a sound understanding of purpose, such committees are left with no mark against which to gauge their effectiveness.

Creating a diverse membership mix. When considering diversity in the context of the mix of loan committee members, the recommended objective is diversity of thought and experience. Loan committee membership tends tend to fall into the following personality archetypes:

The Supporter—This person tends to be agreeable to every loan that comes into the committee, not because he or she doesn’t care, but because he or she lacks the courage or experience to challenge what is being presented.

The Clock Watcher—This person keeps everyone on task and makes sure that meetings don’t last for six hours.

The Stickler—This person has deep knowledge of bank policies and regulatory guidance. Every committee needs a stickler.

The Pragmatist—This person provides an unbiased voice of reason supported by experience and a strong set of credit skills.

Ample diversity of committee members according to these personality archetypes is critical to the effectiveness of loan committees, as each member uniquely contributes to the purpose and, thus, prevents the undesired conformity of Groupthink.

Effectively communicating the message. Loan committee meetings should serve as a forum for lively debate and for fully airing thoughts on issues brought for consideration. Committee members must be open to and encourage diversity of ideas and welcome candid discussions to thoroughly consider all aspects of a committee’s agenda. Thus, tolerance and a willingness to listen are important traits for loan committee members.

Taking minutes that matter. In achieving effective communication, accurate minutes must be kept of loan committee meetings. This will help in producing a high-level summary of the discussions that take place within each committee meeting.

Minutes should include relative insights on not just the primary topics that are discussed, but also on each subtopic—as these subtopics can often have a great impact in how lending decisions are ultimately made. In addition to tracking the meeting topics, keeping accurate minutes should capture the details regarding specific loan approvals as well as document discussions regarding any type of necessary follow-up actions for accountability.

Obtaining the right information. To make an informed loan decision, committee members need accurate, concise and unbiased information about the loan being presented. The primary considerations of the loan committee in reviewing loan requests are:

– ability to repay (cash flow),
– balance sheet condition,
– collateral and
– management.

Asking the right questions. Developing the habit of asking the right questions is crucial in lending. To do this, a loan committee should develop and implement stringent lending policies, risk and performance measurement methods, and procedures for managing risk. These should match your bank’s goals as well as the level of risk it’s willing to take on.

Maintaining a safe and sound credit culture. For many financial institutions, the loan committee is where the credit culture is defined and maintained. It’s where young loan officers and credit analysts observe what is tolerated and what is expected of them. A loan committee should set the proper example.

The most important habit. While focusing on attaining each individual habit, a loan committee should remember the importance of keeping them all balanced to achieve the most effective overall results. In this way, all of these habits can essentially become the basis for effectively solving problems and maximizing win-win opportunities. endmark


Ancin Cooley is principal of Synergy Bank Consulting Inc., a risk management advisory firm based in Chicago. Regan Camp is risk management consultant for Sageworks Inc., a financial information company and software provider in Raleigh, N.C.

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