The Analyst’s Gut Feeling and Initial Review
A lender called a Credit Analyst asking why a loan in process was taking so long. Surely, the analyst can have the financial spreads completed and ready for review before too long. After all, competitors in the market can get loan applications turned around in minutes let alone days. And this was a potential new customer in a market the Bank is looking to expand. Time was of the essence.
Yet, something stood out to the Analyst. A strange gut feeling when working through the financial statements. The borrower’s credit scores were above 750, the cash flow was at a qualifying level and the borrower had enough cash to support a downside scenario. This gnawing, unidentifiable concern about the potential customer kept the Analyst in a stasis over the loan for more than a day. Time was spent re-examining existing financial statements, pouring through different documents and trying to see if anything was missing. After some effort, the Analyst called the lender back.
Deeper Analysis and Discovery
The Analyst described the borrower as a credit-worthy customer but, unfortunately, this credit extension would not make sense. See, the specific request was to do a cash out refinance of the borrower’s existing residence, but refinancing the loan from a 4% rate to the 6.75% rate just to take some additional cash out didn’t seem to make immediate sense. The lender had rightfully claimed that the borrower came over to the bank due to the personal relationship they had built up and they wanted to use some of the cash to do some renovations around their house. But then, why not a 2nd DOT rather than a full refinance of the mortgage? This question led the Analyst to do some addition digging.
Spending time with customers, understanding their stories and working through financial statements provides a value that many don’t offer in today’s environment.
Upon examination of the borrower’s cleaning business, which generated most of the cash flow, it was clear that margins in the company were tightening. Supply costs had increased dramatically in the prior couple of years and payroll was consistently moving up at a 3-5% clip. Revenues increased slightly but not as quickly as expenses due to the longerterm nature of the commercial contracts. The business had taken out some loans to finance new equipment in an effort to increase efficiency, but the loans were relatively highly priced. The smaller margins in the company led to declining cash balances, increased payables and an overall weaker balance sheet. The company’s trends meant that maintaining the borrower’s lifestyle at the current level would require tapping cash reserves at a level beyond what the operation could support.
The Analyst and Lender worked through these questions and provided an in-depth analysis with the borrower. It turned out that the borrower was not planning a remodel at all and actually wanted the cash out refinance to put some additional cash into the business, feeling the stress of tightening margins. After working through the concerns, the borrower understood more thoroughly the cause of the tightening margins and withdrew the request.
Building a Lasting Relationship
A couple months later, the borrower returned with a business partner and moved to open a line-of-credit request in the business’s name to help shore up working capital needs. The borrower and the partner had renegotiated some contracts with their vendors after the understanding the bank had provided them with and wanted to continue to do business. The entire relationship moved over to the bank and the borrower eventually did end up doing a loan on their home for a remodel on their kitchen.
In an era of industrialization of credit, where loans are processed at near-instant speeds by machines looking to break down creditworthiness to numerical values, differentiation can be done by slowing the process down. Credit worthy requests should make sense both for the customer and the lender and any disconnect is a place to tell a story. Spending time with customers, understanding their stories and working through financial statements provides a value that many don’t offer in today’s environment. This type of service creates loyal and lasting customer relationships that move beyond individual lending transactions.
