Community Banks today are being transformed from simple underwriting to more risk based underwriting or bankers might call it more compliant underwriting.
FDIC, OCC, State and rest of the regulators have cracked down on both the large banks and community banks to lend in a prudent manner. So what does prudent manner really mean??
Underwriting is comprised of 5 parts, narrative, financial spread, global financial spread, eligibility of the lender’s policy, and liquidation policy and write up.
The problem is sales side of leading never see the problems with the loan, because they see revenue and living up their own function. But today, if that sales individual pushes the envelope, they will end up costing the company the significant losses, or even bring a the whole institution down.
Here is a reality check. If I invested a 100,000 in Apple, and it went down 15%, well I will cry for a period of time and say to myself, if I don’t sell, I did not lose. Well banks are a whole different story. If banks lost 15% of a loan portfolio, it is the end. No not the end of the CEO, but end of the bank. Wow – no way – yes – that would be usually enough to destroy the tier I capital for the bank to survive.
There is why the community banks are not lending.
Second reason is the complex tax transactions on the middle market or wealthy market clients. Until 2009, SBA can only lend 2 million, most of my clients could not even cover their credit lines. Furthermore, the credit analyst do not have experience underwriting loans with 5 to 20 affiliated entities. The banks want it for prudent lending to see of there are risk to other loans, but for SBA – they just want to know about the eligibility to see if you qualify for the loan.
So different institution is looking for different things. Yeah, now you are getting it – grasshopper – LOL. So confusion is everywhere. Forgot, did I mention SBA changed the lending guidelines 5 times since 2009. So basically a loan program who has not changed regulations in nearly 25 years – all of suddenly changes the whole program. Then expect all the 10 thousand community banks to immediately train and change the direction of the bank.
While this is going on, the technology changed – went from PC to mobile, went from your desktop to cloud, went from 50 emails to 300, and all the desperation for money all created an environment for fraud, and unscrupulous sales people to get into the lending.
Now you see why there is so much chaos. Why would anyone want to work on a file most people could not comprehend, then to have the borrowers not know who is legitimate and who is not, then the financial anxiety. So until borrowers commits, and lenders work with qualified people, we are going to live with this for a long time.
So if you are a nervous Nelly, and are calling everyone and you wonder why your loan has been passed up, well you know.
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