Counting Character: Banks Consider Intangibles Beyond Customer Credit Score For New Loans

In the misty recesses of history, as commerce began to extend beyond the local market, character, reputation and personal probity were key considerations in determining with whom one did business - or not. As accounting and technology have advanced businesspeople came to believe that the numbers on a financial statement presented a kind of proxy for those traditional assessments. As we have come to learn, sadly, that such numbers can be faked or gamed, personal interaction may be making a comeback.

Ruth Simon reports in the Wall Street Journal:

"Character is making a comeback at your local bank.

As bankers across the U.S. worry less about loans that went bad and more about how to make new loans, some financial institutions are digging much deeper than a potential borrower's credit score or business plan.

Webster Financial Corp., based in Waterbury, Conn., pushes loan officers to scrutinize the tough decisions business owners made to help keep their companies afloat during the recession. At PNC Financial Services Group Inc., the "call sheet" filled out by some bankers as part of the loan-application process includes a section about how businesses rate themselves against rivals.

His lender said Jack Pelletier's character was a key part of its decision to increase credit to his Connecticut business, J.L. Lucas Machinery Co.
.Jordan Peterson, a PNC senior vice president, says the questions are helping the Pittsburgh bank make or renew loans that it would have passed up if bankers weren't trying so hard to gauge a borrower's character.

For decades, deep customer relationships were the bedrock of the U.S. banking industry, especially at small financial institutions. That ended at many regional and big banks with the rise of computer-driven credit-scoring models, which are fast and cheap but have sometimes backfired.

"We got somewhat lulled to sleep because things were great for so long," said Robb Hilson, head of small-business lending for Bank of America Corp.'s commercial-banking unit. In 2008, steep losses forced the largest U.S. bank by assets to pull the plug on its Business Credit Express program, which relied on personal credit scores to approve big loans to small-business borrowers.

Other widely used measurements of creditworthiness also look less reliable than they did a few years ago. Lower real-estate prices eroded the value of properties often used as collateral for small-business loans. The economic slump crimped cash flow.

As a result, flummoxed bankers are going back to the past. "Somehow character had been lost," said Bob Seiwert, a senior vice president at the American Bankers Association. "Now all banks are taking a second look at this." In a sign of the growing interest, the trade group is adding lessons about how to analyze borrower character to its professional education programs for commercial lenders.

The "silver lining" of the banking industry's loan losses, said Mr. Hilson, is that banks figured out which borrowers have enough character to own up to their problems and work through them.

Still, some analysts say it is hard for larger banks to measure character. "If you are more than a community bank, it is extremely difficult to do," said Chris McDonnell, a principal with research and advisory firm Greenwich Associates, noting that many big banks have centralized their credit operations.

In a survey late last year, just 17% of small-business owners said their banks had proactively discussed the recession's impact on their businesses, according to Barlow Research Associates, which tracks lending.

Some bankers worry that putting much more emphasis on nonfinancial factors could expose financial institutions to discrimination claims. And even advocates of character-based lending concede such qualities are incredibly hard to quantify.

Cullen/Frost Bankers Inc., of San Antonio, puts its new bankers through six weeks of classroom training to learn about balance sheets and cash flow. Then the bankers go on the road with more-experienced loan officers so they can learn "the art form as well as the science" of judging character, said Dick Evans, chairman and chief executive of Cullen/Frost.

Webster Financial says its assessment of Jack Pelletier's character was a key part of last September's decision by the bank to increase by 20% the credit line extended to his company despite a sales decline.

J.L. Lucas Machinery Co., a Waterbury, Conn., remanufacturer of grinding equipment for the bearing and automotive industries, used the higher credit line to secure an important order from a large Japanese customer. "We got the order, the machine was shipped, and everyone was satisfied," Mr. Pelletier said.

Timothy Bergstrom, a Webster senior vice president, said it made a difference that Mr. Pelletier "was very proactive" in addressing his company's problems.

First Midwest Bancorp incorporates its assessment of a borrower's character into loan decisions and the bank's collections effort and strategy. Character helps determine whether First Midwest will "leave the underlying property in the borrower's hands" or "force a foreclosure" if a borrower can't make payments, said Michael Kozak, chief credit officer at the Itasca, Ill., lender.

Some bankers say a borrower's payment history is the best way to judge character because it shows willingness and determination to repay. Determining whether borrowers are meeting their other obligations "is the only assessment from a character standpoint we can do," said Mark Edwards, head of small-business lending at BB&T Corp., a regional bank based in Winston-Salem, N.C.

Looking for Loans Access thousands of business sources not available on the free web. Learn More M&T Bank Corp., of Buffalo, N.Y., turns to local advisory groups that include accountants and lawyers. In addition, loan officers are being reminded to spend more time calling on customers and local chambers of commerce, said Robert Bojdak, M&T's chief credit officer. The bank still relies more heavily on credit reports in urban areas like New York City and Washington, D.C.

First Niagara Financial Group Inc. is hiring bankers with deep roots in local communities as the Lockport, N.Y., bank expands. "They know who is bankable and have lists of centers of influence," said Daniel Cantara, a First Niagara executive vice president.

The back-to-basics strategy has helped First Niagara scoop up "blue-chip" clients who were dissatisfied with their treatment at another bank when the economy sank, he added. Many of those borrowers rode out previous downturns and "were well-known in the community for being willing to stand by their obligations."

Dun & Bradstreet Credibility Corp. is seeking to profit from the increased interest in character by selling payment records and information gathered from social networks and other sources that can boost a borrower's credibility.