Throughout the Great Recession of 2008 I ran one of the top performing loan workout departments in the state of Michigan. I say that not because of the value or volume of nonperforming loans that we managed, but because of our process. We moved assets through the workout process quickly and more efficiently than most other lenders. From the time a non-performing loan entered our domain the date of every milestone in the life of that loan was pre-planned and scheduled. Accountability and a zealous focus on hitting those dates were the main concepts we managed and measured ourselves by. We kept our process simple, repeatable, and straightforward. We treated our borrowers with dignity and respect. We were honest and transparent with them. Although we were respectful, we did not pull any punches. Which by the way, was another distinguishing aspect of our process. Some lenders got personal and brutalized their former valued customers. This almost always has a negative impact on borrower cooperation and ultimately, the speed of resolution. We moved aggressively and fast to first obtain a consent judgment or a deed-in-lieu. Then, if possible, we worked with our borrower to turn around or liquidate the collateral assets. The particular path we choose was of course dependent upon which one led to the optimum resolution for each situation. Sometimes it was more expedient to turn around a business or project and return it to performing status than to work to put an asset in saleable condition and market it for months just to record or confirm a loss in the end. Sometimes the imperative of the special assets department to minimize losses and maximize recovery for the lender can become obfuscated by other factors, be they external or even personality issues among the parties.
One of the biggest banks in Michigan would routinely default a troubled loan, begin charging the default rate of interest (which of course the borrower had no hope of paying) and ship the whole file off to the bank’s lawyer who ran up significant legal obligations for the borrower and the bank. During the period that the loan was in the lawyer’s hands (one to three months), the only substantive thing that typically happened was that all parties wasted significant time and money. At the same time, other banks seemed overwhelmed and disorganized; sometimes taking months just to begin resolving troubled debt. In both cases, a good deal of money was left on the table, typically causing both parties to suffer more than was necessary.
In my opinion, the bank’s course of action should be driven by the aforementioned imperative to maximize the recovery to the lending institution. This can sometimes be guided by the time value of money and sometimes by that all too familiar pressure to get any NPL off of the balance sheet as quickly as possible. Although, just dumping non-performing assets to get them off the lenders balance sheet can be a costly decision that might not be necessary if the workout team is very expeditious and sticks to the initial schedule. Once a business or project is turned around and performing again, the lender has to wait six more months until regulations will allow it to be classified as a performing asset again. Even still, this may be the most expedient course of action. Other times the borrower will be directed to find a new lender if possible. This of course will depend on the specific facts of each case.
In my experience, most borrowers are decent people who want to find a way to resolve their loan problems. Given the chance, most will work with their lender to minimize their loss and maximize the bank’s recovery. Notwithstanding borrower issues, it is the job of the workout team to stay focused and on schedule. Time really is money!
Sometimes it may be cost effective to bring a third-party professional in to speed up the process. This can be especially useful if the parties to the negotiation are not on the same page, the situation is quite complicated or if the resolution process has stalled. A Turnaround Management Association, Certified Turnaround Professional (CTP) is ideally suited to improve this process. Initially, bringing a CTP to the table provides a stabilizing influence. Communication becomes informative, clear, and transparent. Cash flow is addressed immediately and an initial plan, agreed upon by both the lender and borrower, is put into place. We work together to proactively resolve the situation to the lender’s satisfaction.
Burke Advisory Services
October 5, 2020
Kevin Burke is a member of the Turnaround Management Association and a Certified Turnaround Professional. A graduate of the Villanova School of Business, he has over 35 years of experience in banking and executive management. His management consulting practice is located in Troy, Michigan.