"In today's tough business environment, we're all looking for ways to control expenses," says Lee B. Murphey, executive vice president and chief credit officer at First Liberty Bank (Macon, Georgia). "Since 'back office' functions, such as credit, don't have direct revenue associated with them, banks can often target these functions for cost-cutting."

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

That could turn out to be an extremely costly mistake, contends Murphey, who sees disturbing parallels between today's conditions and those of the late 1980s. Some precautions he recommends:

1. Assess the quality of people in the credit and lending functions. "Without sufficient quantity and quality levels of people in credit and lending, it can be difficult to identify trends and problems associated with those trends," he says. You need a good credit staff (quality issue) and one that is not overworked (quantity issue) to warn you of trends. They can provide cautions such as:

• "We're reaching out too much."

• "Our policy says this, but we're doing something else."

• "We are making too many exceptions."

2. Make sure your credit-scoring model is adequate to accurately assess changes in customer risk profiles.

3. Ask yourself such questions as:

• Does our competition sometimes dictate our loan terms?

• Is our loan pricing driven by competitive pressure rather than by the loan's inherent risk?

• Do we make loans to industries about which our lenders are unfamiliar or lack full understanding?

4. Be willing to turn down loans. "If a bank down the street is willing to make a loan for less margin in collateral than you are, or is willing to make a loan without a personal guarantee that your policy requires, then let the loan go."

5. Go to bed each night asking yourself:

• Has the level of exceptions we make increased today?

• Who is making these exceptions?

• Why are these exceptions being made?

• Are these exceptions acceptable?

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.