What Challenges Keep Lenders Up At Night?

At a time of market recovery coupled with unprecedented regulatory pressures, banks, credit unions and other lenders are contending with increasing challenges. Last month, EDR Insight conducted its Benchmark Survey: Lenders’ Scopes of Work for Commercial Property Due Diligence, and risk managers weighed in from some of the largest institutions down to community banks, as well as credit unions and insurance firms. The findings highlight the top challenges that lenders face today.

Competition Tops List of Lender Challenges

One question asked respondents to score specific types of challenges based on a scale from 1 to 4 (1 = not at all challenging to 4 = losing sleep over it). Notably, none of the challenges exceeded a weighted average score of 3. The biggest pain point now, not surprisingly, with a weighted average score of 2.60 was “competing with other lenders.” It is worth noting that a significant 90 percent of respondents not either a “marginal” or “meaningful” improvement in credit availability for commercial properties, and 45 percent are seeing “more serious inquiries from borrowers related to buying properties.” With that improvement comes intense competition to originate new loans and beat out the competition. These findings are consistent with what economist Ryan Severino noted in September’s Reis Capital Markets Briefing for 2Q 2014:

“Loan origination volumes thus far in 2014 are disappointing. However, as property valuations continue to increase, it will encourage more originations and more refis, but lenders should get used to the intense competition as it is unlikely to abate any time soon.”

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Other Top Challenges

Following closely behind competitive challenges was “compliance with changing regulations/policies” with a score of 2.52.  Lenders are dealing with the increase in resources needed to devote to compliance efforts. Tasks that once took a bank employee part-time now take multiple people full-time, and many lenders feel like they are constantly preparing for the next audit, internal or external.

While compliance with new regulations and new competitors remain a major challenge, lenders are also challenged by “understanding environmental reports, making risk-based decisions,” coming in at 3rd with a score of 2.13. Several respondents, particularly from community banks, noted a lack of experience among their lending staff, making it difficult to interpret environmental reports and plan next steps without input from outside environmental expertise. Another cited the challenges created by “environmental consultants not providing clear and strong recommendations and conclusions” or “difficulties associated with interpreting environmental risks and communicating those risks to lending staff and upper management.”

Concerns about cost constraints for conducting property due diligence were fourth with a score of 2.05, and concerns about time constraints were sixth with a 2.01 score. In between in fifth pace were challenges associated with writing an environmental risk management policy.

Despite a relatively low score of 1.91, it is clear from the open-ended comments from respondents that “third party vendor management” is also a top-of-mind challenge. Compliance obligations for 3rd party vendors are much more involved than ever, and lenders are paying much closer attention to the firms they rely on to ensure proper oversight, consistency and quality. Complying with increasingly complex new rules also requires a greater human commitment, and some institutions have responded by hiring full time staff strictly to handle 3rd party vendor management challenges.

The results clearly point to a lending world where the most intense pressures are associated with finding new lending opportunities in an intensely competitive market amid growing compliance challenges.  Time and cost constraints for environmental due diligence are challenging, but less so than more immediate business and compliance issues.

About EDR Insight’s Benchmark Survey:

Lenders’ Scopes of Work for Commercial Property Due Diligence

This EDR Insight survey was completed between September 8th and September 29th, 2014 and reflects the responses of 109 risk managers across the U.S. Respondents represent a broad swath of lending institutions as follows: 16% were from large international/national institutions, another 15% from regional banks, 58% from community banks, 8% from credit unions and the remainder from CDCs or insurance companies.