Introduction
As a Community Development Financial Institution (CDFI), your organization plays a vital role in providing financial services to underserved communities. Underwriting is a crucial aspect of your operations, and there may come a time when you need to hire an underwriting consultant to support your lending operations. CDFIs hire underwriting consultants for different reasons; whether to provide capacity during periods of increased workload, augment staff shortages in situations like resignations/retirements, or simply acquire expertise for a particular type of transaction. Whatever your reasons are, there are several important factors to consider. In this blog, I will share my recommendations on things to consider before hiring an underwriting consultant for your CDFI. Before we dive in, it is important to note that within the realm of CDFI consulting, various consultants exist, including strategic consultants, underwriting consultants, HR consultants and more. However, in the context of this blog, my focus will be on underwriting consultants. Please note that this article reflects insights drawn from my experiences as a CDFI consultant and while I strive to provide accurate and helpful information, the content is not exhaustive and individual experiences may vary.
1. Consultants and Employees: A Synergistic Approach
Before deciding to hire an underwriting consultant, you must first recognize the distinction between hiring a full-time staff member and hiring a consultant. Consultants offer specialized expertise and can provide valuable insights to address specific challenges. Unlike regular employees, they may not fully integrate into your organization’s infrastructure, so try to ensure that your expectations align with the consultant's role and responsibilities. I have spoken to CDFI Executives who contemplate the right time is to engage an underwriting consultant. Most Executives think of this choice as zero-sum"...either I hire an employee or hire a consultant". From my experience, it is best to have both on your team. In-house underwriting staff and external consultants bring different values to your lending operations and having access to both will surely enhance your operations if utilized correctly. I liken this to owning a car but having to take a taxi from time to time. Even though a personal car comes with its conveniences, there are moments when taking a taxi better optimizes your needs. I consider the consultant-employee dynamic as a complementary relationship. Employees possess institutional knowledge, while consultants offer fresh perspectives. Utilize both resources effectively to maximize your organization's potential.
2. Understanding the Type of Consultant You Need
Underwriting consultants vary in their capacity and expertise. Some may specialize in handling specific loan types while others have experience in particular geographical regions or fund sources. Before reaching out to a consultant, it is important to determine your exact requirements, such as the scope of work, required skill sets, and the duration of the engagement. For instance, if you need a consultant because your CDFI witnesses seasonal increase in loan applications, a firm with adequate staff to handle your loan volume may be ideal. If however, you are looking for expertise in say New Market Tax Credits, then the consultant’s experience underwriting such deals become more important. Matching the right consultant to your needs will maximize the impact of their services. Remember, consultants are not one-size-fits-all so consider the specific challenges you face to find the right match. It may also be advisable to hire different consultants for different aspects of your operations. At Overwrite, we try to be as much of a one-stop shop as possible. We service our CDFI clients with different types of underwriting as well as technical assistance support and loan related consulting; all under one roof. However, we certainly cannot do everything and are limited by the number of services we can offer. We however have a vast network and are always happy to refer clients to other CDFI consultants that may better cater to their needs.
3. Be strategic when engaging an underwriting consultant
I have had conversations with CDFI Executives who want their in-house loan officers to become more of ‘community loan officers’ engaging directly with prospective borrowers and doing business development in the community. In such scenarios, CDFI Executives may explore completely outsourcing the underwriting function so their loan officers can concentrate on building those community relationships and enhancing the loan pipeline. Another real-life instance is a CDFI that secured a government-backed fund source which required a unique style of underwriting that didn’t fit their model. In this case, the CDFI decided to outsource all loans for that particular fund source so as not to distract their in-house team from their core lending operation. There’s also another instance of a training focused CDFI looking to outsource the little lending they do every month because their loan volume does not warrant having in-house underwriters on staff. Some CDFIs also tend to use in-house underwriters for larger loans while utilizing consultants for smaller ones. Whatever the case is, being strategic when engaging a consultant will help produce a better outcome. Be sure to clearly articulate the specific problem or challenge you want the underwriting consultant to address. Communicate this upfront and ensure the consultant understands your objectives. A well-defined scope of work will enable the consultant to focus their efforts effectively, leading to more successful outcomes.
4. Communication and Training
Clear and effective communication is the cornerstone of a successful consultant-client relationship. Ensure your consultant is aware of your preferred channels for communication and establish regular check-ins. Creating a communication plan ensures that expectations are met, and issues can be promptly addressed. It also helps to assign a dedicated point of contact when engaging a consultant. This is especially important for underwriting consultants as the flow of loans may require some back and forth. In my experience, there may be a 2-6 week ‘adjusting period’ that an underwriting consultant needs to get into the swing of things. Remember that underwriting consultants are an extension of your lending team and may rely on the existing processes, loan policies and underwriting templates unique to your organization. The trick is not to wait to hire a consultant when the need is greatest. Try to anticipate your needs and give adequate time for acclimatization. Also, while consultants bring valuable expertise, they may still require training on your organization's specific processes and systems. Providing them with the necessary training upfront will help them integrate seamlessly into your operations and deliver more effective results. This training doesn’t need to be exhaustive however and can be as simple as a 60-minute orientation.
5. Gain Buy-In from Other Stakeholders
An underwriting consultant's success relies on the support and cooperation of your internal team as well as other stakeholders. Before engaging a consultant, address any concerns or divisions among your staff regarding the consultancy. An aligned and united team will enhance the consultant's efficiency and effectiveness. Transparency about the consultant's role and objectives can help ease any concerns and foster collaboration. This is not only limited to the direct lending team. Other stakeholders such as credit committee members, technical assistance officers, marketing staff, select borrowers and even other consultants should be kept in the loop. An easy way to do this is to invite a prospective consultant to your regular all-staff meeting to answer any questions stakeholders may have.
6. Understand that hiring a consultant is not a magical fix
While a consultant can provide valuable support, they are not a remedy for all your organization's challenges. As a leader, it is crucial to recognize that the ultimate responsibility for your CDFI's success lies with you and your executive team. A consultant's role is to complement your efforts, not replace them entirely. Most consultants will offer recommendations and feedback. Some can even guide you in developing a strategy for your CDFI. However, consultants will rarely develop, implement and monitor a company level strategy. A good consultant’s role is to provide clarity and support in the middle, not at the very beginning and definitely not at the end. In an underwriting engagement for instance, the consultant will be able to make recommendations as to whether loans should be approved or declined. They can also recommend best practices surrounding loan evaluations and portfolio management. What a consultant can’t do is magically fix the challenges your CDFI may have around loan closing, disbursement, servicing, and other lending operations.
7. Define Metrics for Success
Before engaging an underwriting consultant, establish clear and measurable goals for the consultant engagement. Define key performance indicators (KPIs) such as loan turnaround time, loan quality, credit committee expectations or other relevant issues. Having well-defined success criteria will enable you assess the consultant's performance and their impact on your organization's goals. At Overwrite, we typically draft a scope of work in collaboration with our clients. We also take some time to explain our client agreement before signing so all parties are made aware of responsibilities and expectations. This ensures both parties are aligned on the desired outcomes.
8. Regular Meetings and Feedback Mechanisms
Maintain open lines of communication with the consultant by scheduling regular meetings. The consultant should be made to touch base with their point of contact frequently, ideally with weekly 15-minute check-ins or monthly hour-long meetings. Other executives such as the CEO, Executive Director or Director of Lending may opt for a Quarterly meeting with the consultant. Frequent feedback is essential for staying on course. Implementing a vendor appraisal system can also provide an objective evaluation of the consultant's contributions and identify areas for improvement.
9. You can negotiate with consultants
Some CDFI consultants may frown at me for revealing this, but it is important for CDFI Executives to know that while hiring a consultant, nothing is set in stone. What I mean by this is anything can be negotiated. Whether it is the price of consulting services, client expectations, scope of work etc. Despite this, it is important to honor existing client contracts in the interim and iron out a systematic process for renegotiating contracts if necessary. Renegotiation may require several meetings over multiple weeks/months. Note that consultants will always strive to lock clients into their standard way of doing things because this makes it easier for them to deliver the same level of work for multiple clients consistently. However, different CDFIs may have unique needs which may require a little digression from the norm. When negotiating with a consultant, be objective and transparent. Remember, this is a partnership and if one party feels short-changed, the goal may be jeopardized. If you are a CDFI Executive negotiating on price for instance, it may not be enough to simply request a lower price for consulting services. A better approach may be to trade some guarantees for the reduced price (examples are a minimum number of work hours per month or a standard retainer). You can also redefine the scope of work to make the consulting assignment less complex. Wanting to hire a consultant that will originate your loans, underwrite transactions with a 24-hour turnaround, communicate with the borrowers, present to your credit committee and send out offer letters is all fine and good. However, wanting to hire an underwriting consultant that does all this without a premium rate is unrealistic. There may be situations where CDFI Executives inherit a consultant from a previous administration. As a CDFI, you can go back to the table to re-negotiate existing consultant contracts if you feel there is a need to. In doing so, be sure to weigh the cost/benefit of renegotiation. For instance, if a 3-month renegotiation saves your CDFI $500 a year, is it really worth it? Be careful not to re-negotiate too often and always remember that a win-win approach is best. Renegotiating contracts once every 1-3 years may be ideal. In doing so, note that the consultant is not legally obligated to accept your terms. However, it doesn’t hurt to try.
10. Two-way rating
Be aware that as you are evaluating your consultant, the consultant in turn may be evaluating your CDFI. Being prepared, establishing clear lines of communication, paying the consultant as at when due, and addressing any unforeseen issues in a prompt manner will put your CDFI in a better light within the consulting community. This in turn may open your organization up to future opportunities such as new funders and partners. I have come across many instances where consultants love their clients so much, they eventually become employees. I have also seen consultants write their clients letters of recommendation and draw their attention to funding opportunities. Your professionalism may go a long way to determining the extent to which your consultants advocate on your behalf. Afterall, consultants succeed when their clients succeed.
Conclusion
Hiring an underwriting consultant can be a valuable investment for your CDFI, but it requires careful consideration and planning. Understanding your organization's needs, getting buy in from stakeholders, communicating effectively and being professional is the foundation for a successful partnership that drives positive change and growth within your organization. Remember, the consultant is a partner, and their success is intertwined with yours. By fostering a collaborative and supportive environment, your CDFI will thrive and make a lasting impact in the communities you serve.
About Overwrite
Overwrite is a firm that provides outsourced underwriting, technical assistance and loan consulting services to Community Development Financial Institutions (CDFIs), Credit Unions & Community Banks. Our sweet spot is working for small to mid-sized CDFIs with <$50m in assets. Please reach out to inquire about our consulting services here. You can also email us at info@overwriteinc.com