With tighter lending guidelines, costs are passed to consumers
Glenwood Springs, Colorado CO
It seems that in this space, you see a lot about those excluded from the postcrisis recovery (which may not be a recovery at all, but that’s another story).
That’s not because we’re focusing on isolated cases but rather, well, there’s an awful lot to write about. And, as the circle of those who have access to capital tightens, be it home loan or business line of credit, we all suffer. It means fewer jobs, and less revenue in all sectors of the economy.
Take business lines of credit (LOCs). This is borrowing by businesses, large and small to purchase inventory, or fund operations for seasonal businesses. LOCs are the lifeblood of free market endeavors, and vital for entrepreneurs from farmers to car dealers.
Occasionally, we’ve mentioned the old banking mantra, “The three C’s of lending are Credit, Collateral and Character.” Old line bankers often opine that the greatest of these is character. This is more than lip service to an idealized vision of the wise and kindly country banker. Credit can be simply statistics that reflect a certain past, but uncertain future, situation. Collateral fluctuates in value. So it could be, of the three, character is the steadiest constant. But character is largely out of the equation when it comes to LOC lending guidelines for big banking.
Here’s an example (And, if you put 10 business people anywhere in a room, you’re likely to find that five of them have a similar story):
A retired banker, now a business loan broker, tells of a borrower with several years as a Class A customer of TBF (Too Big to Fail) National Bank. The customer’s LOC had been meticulously serviced, no late payment ever, with the line reduced to near zero annually.
The line was secured by a combination of inventory and accounts receivable. The inventory consisted of a certain commodity, and probably had additional lending criteria because of its volatility. To get the best price, the borrower regularly had to buy in quantity. TBF determined that the loan profile wasn’t in line with its new underwriting guidelines, and the borrower was told to move the loan out of the bank. In the words of the iconic “Godfather” line, “Nothing personal, just business.”
So the loan arranger shopped the deal at several banks, finding most institutions have racheted down guidelines to the point that few borrowers are chosen.
He did, finally, find money: at an 18 percent rate. The borrower had probably been paying around 5 percent for his LOC. So who do you think will pay the extra 13 percent?
Riiight; the customer.
Nothing personal, just business.
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 dalrymple@ sopris.net.
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