Academic journal article ABA Banking Journal

The Death of Character Lending

Academic journal article ABA Banking Journal

The Death of Character Lending

Article excerpt

Some people reading that headline may think, "It's been dead for years." But that's not correct.

Even though in some markets, and at some institutions for certain categories of loans character lending may be a thing of the past, it is still around. For many community banks it remains their touchstone. We would submit that it also still exists at large banks in certain areas or markets. Some of them delegate greater authority to regional managers or line-of-business heads when it comes to credit granting. Even with credit cards, long a credit-scored product, some banks overrule score-based turndowns for customers they know well or for particular circumstances, as you can read in the feature beginning on page 32.

Still, bit by bit, the ability--or, sometimes, the inclination--to make judgment calls on credit has eroded.

It's always impressive when you look at a deep canyon and realize that the river at the bottom has cut through those hundreds of feet of rock. Especially because the year-to-year change is infinitesimal. So it is with the kinds of changes impacting what is loosely referred to as character lending. We can point to some specific changes that have impacted it (or will), such as fair lending, UDAAP, some of the new mortgage regs, and overzealous examiner scrutiny. There is also the impact of technology, and the pressure of competition. Some of these things are based on worthy principles. But collectively and in practice they can restrict the very thing they seek to protect.

Bankers are in the business of helping people do things, build things, run things. Generally bankers are conservative in handing out other people's money to finance projects, as they should be. …

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