Lending to a real estate customer on an unsecured basis has been a difficult dance for as long as bankers have been lending money. Bankers want the collateral to secure payment if cash flow is insufficient to service the debt. Borrowers would prefer not to go through the expense of securing a loan if for some reason they are not able to pledge collateral. Given the heated competition between banks for business, so long as credit and/or cash flow have been sufficient, bankers have been making loans on an unsecured basis to attract new customers or to keep existing clients.
But it looks as if this dance step is going out of style.
I have been hearing reports of bankers declining unsecured loans where a year ago the loans would have been made with hardly a second thought (again, so long as credit and cash flow were sufficient). Now, even with good credit and cash flow, customers are finding bankers hesitant or flat out unwilling to discuss unsecured facilities.
And what about those unsecured loans that were made or extended a year ago and that are now coming due? Bankers are having understandably unpleasant conversations with customers and saying that the loans will not be renewed without acceptable collateral. Caught unaware of the change in policy, the borrowers are scrambling to satisfy the bank’s new requirements.
So why this change in policy? Should we be angry with the banks for pulling a switch?
We all must know by now that banks have been and continue to be under extreme regulatory scrutiny and capital pressures. I believe that, left to their own devices, banks would cut back on unsecured lending but not reduce it so far. I believe that they would also give customers more time to transition to the new rules.
But they are not acting alone.
The banking regulators, in an effort to protect the public and ensure a strong financial system, are cracking down on lending policies deemed to be overly risky and asking banks to return to basic, fundamental lending. Unsecured lending is being targeted as risky and bankers are being told to adjust their policies quickly. In this current environment the banks are not able to argue the point and have to comply.
My advice to anyone who has unsecured debt that’s approaching maturity is to get with their bankers immediately to discuss expectations. The more time you have to adjust to the new policies the more options you might have.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
