Loan rule changes vex banks, borrowers
This is the time of year to remember the old adage “Home is where, when you go there, they have to take you in” and its obvious corollary “And once you’re there, they can’t make you leave.” (Some of you with offspring who recently graduated from college know what I’m talking about.)
So it is with banking today. All financial institutions are stuck with loans that they’d love to get rid of but can’t.
These are deals that were done before the rules changed. For example, a loan made in 2007 that met all the regulatory criteria of a good loan then could be classified as a bad loan in 2008. It’s as if the NFL changed the rules of the game retroactively, so suddenly John Elway doesn’t qualify for the Hall of Fame anymore.
The worst bank examiner rating for a loan is “probable loss,” which means that the bank has to write off the entire loan, taking the balance out of capital and current income. The next worst is “nonaccrual,” which means that the bank, rather than booking interest income on the loan, must apply the money received to the loan balance on the bank’s books, and realize a profit or (loss) only when the loan is paid off, or the foreclosed property is sold.
But a funny thing may have happened on the way to “nonaccrual”: the loan didn’t turn into a bad loan, it was just called bad by the regulators because, well, the rules changed between exams.
Nonaccrual loans, along with foreclosed collateral, are held to be an indication of a bank’s health. A large percentage of these problem assets in relation to an institution’s capital can mean that the bank is in trouble. However, if one digs into the makeup of these nonaccrual loans, in many cases, a surprising, even shocking, number of them are paying like clockwork.
The following scenario is true; I don’t even have to change names to protect the guilty. It’s happened so many times at so many banks, it’s part of urban folklore:
A business owner has been a premier customer of the a bank for, say, 15 years on both sides of the ledger, as depositor and borrower. He comes to the bank president for a relatively small increase in his business operating capital loan; a request that’s been routinely granted for years. The CEO says, “Sorry, we can’t do that. As a matter of fact, we’d like you to move your loan to another lender.”
Of course the guy is ticked off and marches out of the bank vowing never to do business with it again, while figuring that he’s the cream of the crop of bank customers; after all, hasn’t he been told that for 15 years?
Turns out, the rules have changed for everybody. The three banks he subsequently calls on tell him he and his business can’t be accommodated. He then goes back to his old banking partner and announces, “It’s just you and me kid. Looks like we’re stuck with each other.”
These rule changes can play havoc with one’s stats. I remember a graduate of Southern Methodist University confiding that he “was an outstanding athlete for two years in college. Then the Southwest Conference integrated and I became a very mediocre one.”
— Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is firstname.lastname@example.org.
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