Conquering the Commercial Lending Obstacle Course

Mitch Woods: Welcome to today's episode of Lending Made Easy. Today we're joined by David Catalano and Bryan Peckinpaugh, and we're gonna talk about how you can overcome some common obstacles in commercial lending with technology. Specifically, we're talking about difficult loan origination processes for larger deals, some cumbersome renewal processes for the bank or for the borrower, tracking covenants, and managing risk effectively.

So talking about obstacles and thinking about this episode, it really made me think about the time when I did one of those obstacle course relay races and how each obstacle was just a unique challenge, climbing up and over a cargo net, scaling a wall crawling through the thick mud. So each obstacle had some ways that it would make it a little bit easier like a rope that would help you climb or another person to give you a boost. And I think the technology can kind of be like those things that lower the hurdles for commercial lending. So to start off today's episode, I just wanted to ask, how do you see technology helping bankers overcome some of these common obstacles in commercial lending?

So David, I'll kick it off to you first.

David Catalano: Thanks, Mitch. Lots of stuff to talk about on this episode. So one of the things that we see over and over, despite the size of the organization or how sophisticated they are with our deals, they're duplicating data entry throughout the whole process. So you've typically see in a commercial lending environment where you've got basically point solutions or siloed solutions that do a very particular thing, like document preparation or tracking or CRM or spreading as an example or doing a credit memo, and you've got all of these different but unconnected solutions, they don't talk to each other. So when the next person in the process has to do their work, they may be starting from scratch with some of the same information that the person before them has already used, has already created, has already put in some type of solution.

So this, it's this repetitive, over and over duplicate data that, you know, when you think about technology, that's what technology can solve is one of those, one of those huge, what I would call efficiency drains on a team. As a result of that, this team that we're talking about that originates, underwrites documents, commercial loans and does the servicing, they essentially have an increased capacity if they can eliminate some of these bottlenecks.

So it's not real. You know, we're not talking about, you know, anything highly sophisticated here. We're just talking about one person entering information and the next person thereafter using it forever basically. So I'll let Bryan talk about that or other things that he wants to mention.

Bryan Peckinpaugh: No, you hit the nail on the head. I think that's a wrap for, this episode. Yeah, but you're spot on, David, right? you've gotta look at all of those aspects of your process and, you know, this is one of those where it is gonna be very unique to your institution. So we talk all of the time here at Baker Hill about a digital loan adoption curve. So think about an S going from low left to upper right, where there's some low barrier to entry concepts that you can start to tackle. Most institutions have probably done that today, whether that's, you know, getting a spreading solution to help you with financial analysis.

Maybe you have put a CRM in place to some degree, maybe you've even built some what we would call manual tools, but they can be very effective tools leveraging different aspects of even Outlook or Word or Excel to facilitate your lending and tracking processes. But then you start to hit a very rapid, accelerating growth curve that depending on where you are as an organization, you will be able to only go so far up that curve at one time. And so you really needed to do an assessment of what you have today. Where are those stop gaps that David mentioned and what would bring the biggest value to your organization? What is holding you back from a commercial lending perspective? So, I think it's always important to, to start with, you know, some level of operating model work.

You know, identifying a good future state target operating model. Now, it doesn't have to be in depth. We're not saying you need to go hire a very high powered, very expensive consultancy to, to walk you through an in, in-depth review and process mapping, et cetera. This can be something your organization takes on on your own. And that can be as simple as just questioning people who participate in the process. What are the pain points that you're experiencing? Looking at where you're losing deals and why you think you're losing deals? and getting beyond just the anecdotal, try to get to the numbers as much as possible. Start to try to track some of these activities and processes. And what you'll likely find very quickly is, The things that are hard for you to track. So if it's hard for you to track cycle times, if it's hard for you to track how long something sits in somebody's hands, if you hear a lot of, bickering, for lack of a better word, in between groups who participate in the process where the RMs say, I can't ever get it out of underwriting and underwriting says I never get, complete loan packages to look at. and we have back and forth. 

The more you hear those types of things, that's where your problems are going to be. 'cause if you can't track it, that means there's probably gonna be breakdown. you're not gonna be as efficient as you otherwise could be.

And you'll find that there's value in just tracking it in the first place. 'cause that'll help you find the actual problems in your process. So walking through those exercises will tell you where to start, and then you can start to figure out through a good partnership. So this goes beyond vendor relationships. This goes on beyond just, I'm gonna go buy a CSO platform, or I'm gonna go buy a spreading solution, or I'm gonna go buy a niche focused c CRE lending system. You know, beyond those types of transactional interactions, really finding a partner who can work with you on. Again, where you are on that adoption curve based on the technology you have, the people you have and the processes you employ, so that they can help you rightsize a solution to get you to the appropriate point on that adoption curve, that has technology, that not only helps you, but that you can consume cause far too often we see people who end up with more than they can handle, and that's arguably worse than having no technology in the first place. So you gotta make sure that what you're buying fits your organization is something that you can take on and realize the benefits of.

David Catalano: That's a really good point basically looking for the bottlenecks in your process and a good loan origination solution is going to be able to measure the time, really help you determine where those bottlenecks are in your process, whether it's credit or, you know, how long it takes the deal to get through the system, or, you know, the average time. And you should understand that. 'cause if you're a commercial, lender, It's 75 days to get the average deal out. Imagine if you cut that in half, right? So we've got a client that told us that they went from 74 to 34, and they were able to fund deals faster than their commercial borrowers needed the money.

So that's, it was the first time in this fellow's career and he mentions that to us. You know, so it's just so important to understand what is my process, where are my bottlenecks? And then how do I solve that? Because the process you're using today is not the process you're gonna use when you employ a technology platform, what you don't wanna do, is take an inefficient process and then try to configure your loan origination solution, or worse yet, try to customize your loan origination solution to reflect a process that is broken. That because it's manual, it's just not efficient. So the technology question is really outside of what's the process like and what could the process be? if we weren't constrained by point solutions and manual work on the team's part.

Mitch Woods: It makes me think, David, you have to, when you're reviewing those processes, you have to ask why at every step. Right? And the answer can't be because we've always done it this way. You know, that's something that I feel like we hear from time to time, and that's where I feel like you have to go in and challenge that process a little bit and understand then what can we do to make this better? And how can technology support that? So I think that's a great point, is being able to take that review of your process and really understand not just what we're doing, but why we're doing it.

David Catalano: I also think that we're getting to the point where the workforce,the new workers have always had a device in their hand. They've always had technology that's been good. They've always had really good consumer technology and then they go to work and they go to the bank and they're looking around and they're seeing a bunch of manual processes and they're wondering, why don't we have good technology here?

Is this really where I want to be? So I think it's important that we understand the impacts of the employees in essentially how their lives change when they have good technology. And it's really table stakes for a lot of people to understand or to work at a place where they have technology that's modern, current, helps 'em be efficient in their work and doesn't give them a bunch of.

You know, rote work that's doesn't require critical thinking. You don't want your employees to just manually do something because they've always done it that way. And then the other thing is the person who won't change. we actually had a bank go all the way through the evaluation process and the CEO stepped in and says, oh, we're not gonna buy it because I can't get the credit team to use it, or I can't get, you know, some group to use it.

It's like, wow. What other things in that bank are being challenged and change management is what they're failing at here, right? You've gotta be able to execute on change management and if somebody just doesn't wanna stop using their manual process, well they probably shouldn't be working there. Granted they have a lot of institutional knowledge, but gotta move forward folks.

Bryan Peckinpaugh: Absolutely. So I think at end of the day, what I think is most important and kind of encapsulates all of what we've been talking about, is you really want to go back to a first principles style of thinking as it relates to your commercial lending process and evaluating. All of these areas and to, steal a kind of a catchphrase from one of our partners identifying what is so and working from there.

Because what you will find is some of these obstacles are there for a purpose. So I would say don't try to eliminate obstacles just for the sake of eliminating obstacles. Identify the ones that shouldn't be there and get rid of them because you may well have obstacles in the process to ensure that you only lend high quality credit and if you start to break those down, then you can get yourself in trouble.

You know, systems don't just take ownership for you and make everything you know, magical and happy path. you still have to have those good hard looks at certain aspects of your process. So don't just try to find obstacles and solve them. Again, try to find the ones that shouldn't be there, because big complex commercial lending is going to be hard and it's hard for a reason. We're talking about very large dollars. We're talking about mitigating risk 'cause we don't want big, large dollars that are bound to go bad, and that's going to come with inherent obstacles that you need to ensure you still accommodate for.

David Catalano: Well, it's not change just to make change, right? It's, you gotta be thoughtful about what you're doing here and why are these challenging processes in place today, and they could very well have a great purpose, and that's to slow you down and make you think and critically think about the deal you're working on and understanding those risks and mitigating them appropriately so that you're not just speeding through a process. We don't wanna eliminate critical thinking in the process.

Bryan Peckinpaugh: Going back to your, analogy at the beginning, Mitch, having done a couple of those obstacle races myself. They're not designed to be easy, right? Those obstacles are there for a purpose. if they were simple, nobody would run the races. and they're there to make you push yourself. They're there to make you better. And depending on who you are, some of the obstacles are gonna be harder than others. I may be better at, You know, one of those handlebar crosses, you might be better at a, you know, a bridge climb or whatever you see out there. And that's gonna be same for the financial institutions we serve. Some of these things are gonna be easier for them than other institutions. Could be looking at yourself compared to somebody in your own markets, serving the same customer base that you do with, generally speaking, the same products you do. How you go to market, what's important to you, what makes you as your financial institution is gonna create the unique set of obstacles that you need to solve forand they're gonna be different from the FI across the street.

So again, I come back to making sure you have a good, strong partner in this space who can help you with evaluating those processes who have seen it across a broad array of, financial institutions that can bring best practices to bear, can tell you which of these obstacles you need to train for. Which of these can you get better at? And which ones, based on your particular business model, will always be a challenge for you. So you'll find that right partner. They can definitely help you find the ones to fix the ones that need fixed, and at least help you, navigate as best possible the ones that will always need to be there.

Mitch Woods: I think a good takeaway is just understanding that commercial lending is complex, right? It's not easy. It's not easy, like you said, Bryan, for a reason. But taking that step back, evaluating your processes, understanding your processes, and then finding ways for technology to come in and help make it easier to lower those hurdles a little bit where it's appropriate is really critical to be successful.

So, David, Bryan, thank you guys for your insights today and thanks everybody out there for listening to today's episode of Lending Made Easy.