Banks getting tough on most borrowers
Glenwood Springs, CO Colorado
A lot of banks are shutting the door on borrowers these days. And not just on bad customers. Many who believed themselves to be in the upper 95 percentile of creditworthy borrowers are finding that, suddenly, their bank is telling them they’re not.
What do you do if your bank refuses to renew your loan? Negotiate? Play hard ball by refusing to pay, assuming the bank doesn’t want to own the collateral? Advance immediately to another bank without passing Go? All of the above?
Financial institutions today have very little wiggle room, and negotiation can turn out to be depressingly unproductive. This is because the regulatory agencies are coming down hard on banks, and the regulators have very little latitude because of the network of laws and regulations covering banking today.
Most of these statutes, and the regulations that govern their application, were passed after the Savings and Loan meltdown of the ’80s. They were designed to make sure banking regulatory agencies had effective control of the bank in the event of certain things happening, such as capital dropping below a certain ratio to assets, or a deteriorating loan portfolio.
If an event causes the trigger to fall, then the regulators are obliged to issue directives, such as cease and desist, or prompt corrective action orders, the terms of which, by regulation, are extremely restrictive, even punitive. Unfortunately, they can be so restrictive the bank can’t do business in a normal manner, thus exacerbating a bad situation, which sometimes leads to the very thing everybody wanted to avoid in the first place: a takeover of the institution by the FDIC.
Even if there aren’t formal directives issued, criticism of loan portfolios by bank examiners can compel the bank to ratchet down lending dramatically, and this has been happening with increased frequency.
Lender-borrower relationships are radically different from just a year ago. The other day I was talking to a developer who’s anticipating his loan coming due in a few months. Naturally, he’s hoping for an extension. “They probably don’t want the property,” he mused.
Well, no, they don’t. But when a loan matures, and isn’t paid off, a bank is required to write it down immediately in relation to the current value of the collateral, and regulators are insisting on very conservative write-downs. So, a banker’s thinking is he’s already booked the loss, so he might as well have control of the collateral. This outlook is strongly encouraged by the FDIC.
Actually, the FDIC isn’t necessarily the villain it’s often made out to be. Sheila Bair, the director of the agency, sees the importance of loosening up bank lending, and is in tune with the treasury department’s goal of stimulating the economy. But current laws, regulations, and the dictates of the Financial Accounting Standards Board combine to create an enormous impediment to this objective.
So, if your bank won’t renew your loan, it’s not you, it’s the system. As Hyman Roth of the Godfather would say, “It’s nothing personal, just business.”
And what do you do when that happens? One thing that will always get a banker’s attention is cash. The offer of a curtailment (paydown) of the loan is a good opening gambit. Essential is the presentation of a comprehensive and practical plan to get the loan paid off in a reasonable time frame.
Granted, these are not easy things to do. So, if your banker won’t extend that loan, at least get him or her to pop for lunch.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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