Cover Story

James Cook, Father of the Russian Mortgage

If we speak about the credit boom and its history, no story would be complete without a reference to the mortgage business, which was really the first type of consumer credit available to Russian consumers. If we speak about the mortgage business, the founder of this business in Russia, is none other than American businessman James Cook.

James started working for a mortgage investor based in Richmond, Virginia as a gopher when he was just 18 years old. He ended up working for 6 years there and as the classic gopher-to-president story goes, he quickly turned his menial job into a career. James was one of the youngest graduates of the School of Mortgage Banking and was offered the chance to go to Russia by a government funded think tank, The Urban Institute, that was promoting housing reform in Russia. According to James:

“I remember when I walked out of the interview [to go to work in Russia] that I would never come to Russia…at that time, it seemed like a world away. But then I thought, you never know where your life may lead you. You have to take risks if you want to accomplish anything in life. Life doesn’t happen unless you take chances. I don’t know where I would have landed had I not taken a chance when I made the decision to come to Russia. But I can say with confidence that you don’t often get offered a second chance if you don’t offer yourself to the possibility.”

When James came to Russia, he was given the task to start the system from scratch. With a team of two Russians, he set out to begin teaching Russian bankers and anyone who would listen, about mortgages. The reaction at first was one of disbelief and skepticism. But with all of the problems in Russia at that time, everyone he spoke to believed that this idea might work. By 1996, when James joined Delta Capital, it was a chance to finally put some investment behind this idea. At first, they were given some seed money to get started and the three sat together in the corner of the building. They started making the first mortgage loans in 1997 through a network of Russian banks. By 1998, they were up and running and then the crisis hit. No surprise, from James’ character, that he saw that as an opportunity rather than a problem. That crisis allowed them to expand quickly and banks began to realize the potential of mortgage lending. By 1999, they already had a team of 40 people and had built a mortgage loan book of over $20 million. By 2000, they purchased JP Morgan’s banking license to start Russia’s first mortgage bank, DeltaCredit Bank.

As the market progressed, other banks began to copy the DeltaCredit model. One foreign bank in particular, even copied their manuals without even changing the spelling mistakes! By 2003, DeltaCredit was selected as one of the top 100 companies in Russia and was the highest ranked new company by Standard and Poors (second only to Alfa Bank). Delta Capital was a US government sponsored fund that was established to invest in various strategic business sectors in Russia to help kick start the economy. DeltaCredit was one of these start-up investments (other investments also included private equity investments, ie investments into young or mature companies). With 14 write-offs, the performance of the fund was on average around 1%. Even though DeltaCredit up until 2002 was not taken seriously as an investment, it turned out to be one of the fund’s “home runs”. The fund realized its highest returns from financial services.

Patricia Cloherty, CEO of Delta Private Equity Partners, commented “the man behind all of this [Delta] is James Cook. Since arriving in 1994, he has become a prime mover in introducing residential mortgages to the Russian market.”

In early 2004, after 8 years at Delta, he was recruited by GE Consumer Finance to lead their entry into the Russian market. What GE liked was that not only had he started and successfully ran DeltaCredit over the years, but also built a name for Delta in the market through fi nancial services. DeltaBank, which was another acquisition of Delta, was struggling over the years due to consecutive losses. As a last ditch effort by the board, James was asked to step in and turn around the investment. James spent his first day in the bank going through the facilities and came across a large machine in the basement. When he asked what the machine was for, he was told that it was a credit card embossing machine. That gave him the idea that to scale the business, it would need a radical change in strategy to focus on consumer finance. At that time, banks were primarily offering only debit cards (although they called them credit cards). James worked with VISA to introduce VISA Instant, which could be issued by the bank within 20 minutes at the point of sale.

The next challenge was how to distribute this product in Russia. James then contacted IKEA to see if they would be interested in distribution. As it turned out they were, except that there was already an outstanding tender and the deadline was hours away. James, a near perfectionist, thought that if did not at least try to win the tender, it could be the most regrettable moment in his career. He stayed up late and sent his proposal to the tender by fax, courier and email just to ensure arrival. The next day, he was asked to meet the IKEA team to discuss his proposal. James understood that if he could meet them, that they had a good chance to show them that they were different than most bankers. According to James: “It often happens that most bankers will tell you a dozen reasons why they can’t do something rather than really listening. What we did was listen and then think of a solution on how to make it happen. In the end, we won the contract and within 120 days he mobilized the entire bank to focus on the roll-out. DeltaBank was in business.

Within 6 months, DeltaBank was the No. 1 issuer of VISA credit cards in Russia and within 18 months DeltaBank was sold to GE Consumer Finance for $100 million, making it one of the top 3 banking transactions worldwide in 2004.

While James was Chairman and CEO of GE Consumer Finance in Russia, he decided to take a mortgage to buy another apartment. He recalls leaving the office one day and trying to decide where to get a mortgage. Although James wrote and established the underwriting guidelines and the framework for the industry, even he was was puzzled as to where to go to get a mortgage. All the offers that were in the market were confusing, and he eventually ended up going to a foreign bank to apply. After applying, James waited 3 weeks with no response. Finally, the bank informed James that he was rejected since he already had a loan with them and couldn’t have two at a single bank even though he had a perfect credit history and enough salary to justify 10 loans. James was persistent and finally prevailed after much cajoling. But, he figured, if the "Father of the Russian Mortgage" and CEO of GE Consumer Finance got rejected, what was happening to the average creditworthy customer. This was a bad sign. James felt proud of his accomplishment as pioneer of a key consumer industry, but was shocked to learn how it failed to properly evolve since its creation. He felt that the industry hadn’t changed much since he set the standards years before; that it was somehow stuck in time.

Not one to let grass grow under his feet, James couldn’t sleep at night after this experience. James felt that “something had to be done” to his creation; it needed fixing!! So James set out to find a better way to borrow and began to think what if…what if one could go to a retail shop where one would be guaranteed the best deal in the market among several players? What if one could get a loan with affordable monthly payments and lower down payments and longer terms up to 30 years? That’s when James came up with the idea of Kreditmart and began writing the business plan. At about the same time, James ran into John McRoberts at a cafй, and John began to talk about an idea he had to do an IPO on AIM (London' Alternative Investment Market) to raise money to invest in Russia. John McRoberts was also a Russian success-story as he had recently spearheaded the IPO of the IMS Group also on the AIM. James told John McRoberts about the Kreditmart idea; they agreed that that would be one of the first deals in the pipeline. Over the next four months, the duo met with investors, and the UK market liked the idea. Even though the company didn’t exist yet, the investors believed in the team and their track record. In March 2006, they spent 12 days doing a road show to raise money for Aurora Russia Limited. Pioneer seems to be a common way to describe almost everything James lays his hands on, and this IPO, to no surprise, was no different. They were pioneers in this idea of doing an IPO for a private equity firm focused on Russia. To that end, the first fund raised GBP 75 million (approximately $150 million) to invest in Russia in March of last year. It was a new milestone for James as the fund was even larger than Delta Capital where he started.

Once the money was raised, they set out to begin investing and made three investments within eight months. One of those investments was Kreditmart, which opened its doors to the public on March 19, 2007. The team consists of 40 people from DeltaCredit, GE Money Bank, Citibank, and other leading banks in Russia. Aurora Russia believes that Kreditmart will revolutionize the way banking is done in Russia and they plan to roll out 10 loan shops this year and 5 each year after. The idea behind Kreditmart is to be a risk taker, to be bold, and to distinguish themselves with a solid commitment to customer service. A lot of people talk about customer service, but so few are able to pull it off.

At Kreditmart, there is a 10 minute rule. If a customer comes to the branch before opening, they will always open up 10 minutes early or stay later for its customers. They want to WOW their customers. There’s even a “bring your dog to the bank day”, where you can bring your dog to the branch and they will him a dog biscuit. There are even Saturdays when one can bring your mother-in-law to the bank for a gift (not necessarily a dog biscuit!). If humor is part of the corporate culture, then that will be reflected in how to treat customers. Kreditmart top managers even spend time manning the call center, helping customers, and underwriting loans, so that they don’t lose contact with the front line, the customers. It’s unique in Russia, but according to James’ prediction, he will once again change the way banks and consumer finance companies treat their customers and also improve the lives of consumers.

According to James: “We’ve pioneered a lot of 'new' concepts in Russia and to challenge the status quo is really what makes living in Russia interesting. There are very few places left where you can see the results of your work and where you can change an industry. It makes life worth it. "James reflected, “Success often comes to those who don’t know that failure is inevitable ." James concludes: “That was good advice because at some point you will fail… But those who stay focused on making it happen despite overwhelming obstacles often end up as the ones who succeed.”