Typically, for a commercial loan pricing model to work effectively, a concerted effort is involved. Since a one-size-fits-all approach is rarely truly useful, loan pricing software must be customized to specific goals and objectives of your bank. Assumptions must be set, Return on Assets (ROA) targets must be set, and at least some consideration must be given to the level of risk. All of this takes some upfront effort. But once your software is in place and your loan officers actually begin to use it, what happens?
The answer to that question is largely dependent on your lending culture. How much autonomy do your loan officers really have? If the answer is “very little”, then the software itself becomes your loan officer, and your loan officer becomes a glorified data entry specialist. This paint-by-the-numbers approach might result in a picture of sorts, but it will likely never result in a true work of art.
Loan officers must be proactive negotiators if your commercial lending portfolio is to grow along with the needs of your community. The loan pricing model must be considered a sales tool rather than the Bible of lending. Using loan pricing software as a means to quickly compare the effects of various loan options gives your loan officer the leeway to truly negotiate attractive terms to both your clients and your overall portfolio. For instance, rather than merely negotiating the interest rates at standard terms, an agile approach might include negotiating for a different interest rate at a different term. While such small tweaks do not generally stop a client from choosing your loan product over that of a competitor, they do make a substantial difference in your bank’s cost of funding. Bundling several loans together can also help the total ROA.
Giving your loan officers the tools required to quickly analyze the effect of tweaking the inputs to your loan modeling software will enhance their ability to meet ROA objectives and it will considerably sharpen their negotiating skills.
If you would appreciate more information about agile commercial loan pricing models, please contact us. With years of experience in the loan pricing field, we can customize your loan pricing model to maximize the potential of your loan officers and strengthen your loan portfolio today.