Risk management rules are being revised as a result of the credit crisis we are currently experiencing. One of the categories under review is Customer Behavior. The proponents of the “strategic adjustments” have come up with supposedly new questions in this category.
This makes sense if the questions were truly new questions engineered for the times. However, after you read the questions, I bet you too will want to know why weren’t these the questions from day one. I write about this stuff because this is the type of mentality that is making decisions on who gets a loan and who doesn’t get a loan.
To me, it is frightening. If one is to measure the qualifications of an individual before granting credit, these questions should form the base of any risk management program.
These 4 questions aren’t all of the questions but they seem to form the nucleus of the supposedly new thinking. For the life of me, human behavior has been known to change along with the times for as long as I’ve been alive so where were these questions before the crisis?
- How has my customers’ spending and payment behavior changed?
- When did their behavior change and by how much?
- Has the behavior of all of my customers changed or just that of certain segments?
- What are the major contributing factors to the various changes?
I found these four questions by the way in the February 2009 issue of Collections & CREDIT RISK magazine in an article titled, “Managing Risk in The New Credit Environment”. The article was written by Edmund V. Tribue. I’m not saying Mr. Tribue is out of line or incorrect. I’m saying these really aren’t new questions or new risk management parameters.
The risk manager, in my opinion, should already have a handle on this type of information. When a person applies for a real estate loan for example, his or her spending and payment behavior is pretty apparent and easily accessible from their credit report. If you were a credit pulling landlord or lender, wouldn’t the answers to the above 4 questions scream out at you from the credit report as well as the answers to a few questions of the applicant?
I don’t believe it is the job of real estate investors to be the macro manager of the credit world. But I do believe it is our job to stay on top of our customer’s behaviors in our personal micro real estate arena. If we don’t, or won’t, aren’t we dooming ourselves to failure?
Your Local Newspaper
Believe it or not, your local print newspaper is probably a good source on the credit aroma in your area. I know our paper is not shy about printing news about problems in the local financial world. It tells us about foreclosure filings, credit card default rates, business failures, etc. I could be lucky in that respect. However, you may enjoy such info in your neck of the woods.
Of course, other sources exist and you may have to rely on them where you live. The local real estate association is a good start. You may even have a local lender’s association. Many regions have real estate investment clubs which are excellent information cauldrons.
So maybe new isn’t really new after all.
Photo Credit: danflo