Business Journal Q&A: How new world order in banking impacts borrowers

<p>It’s no secret that bank credit standards have tightened after years of capital market growth and a run-up in real estate values.</p><p>For two decades, money was relatively cheap, and it was easy to qualify for loans. With home values hitting bottom, the average consumer is still waiting to see positive results trickle down from federal bank bailout legislation to buoy market confidence and get the economy moving again. </p><p>The following questions and answers on financial industry trends are based on an interview with Patrick Kilkenny, an independent business and financial services adviser based in Santa Rosa who previously served as president of the National Bank of the Redwoods for 22 years.</p><p>Consulting with a number of banks and financial institutions through Kilkenny Advisors, Mr. Kilkenny recently was retained as an independent consultant to Novato-based Warren Capital.</p><p> Mr. Kilkenny is the current president of the Sonoma County Alliance and is active on affordable housing issues.</p><p>Q. Will obtaining credit continue to be a challenge?</p><p>A. Many people today cannot qualify for traditional underwriting as banks move to ensure that they protect their equity capital and restrict their lending to those with “A” (excellent) and “B” (normal) credit ratings. “C” and “D” credit ratings are considered to be substandard, and borrowers with these ratings must seek funds through alternative lenders and private moneylenders.</p><p>Q. What should borrowers who are in trouble do?</p><p>A. Troubled borrowers are seeking ways to get out of their commitments. Some banks are initially not pursuing the borrowers due to the shear cost of pursuit. However, this will change, and look for banks to become more aggressive in collection activities. Bankruptcy laws are more stringent today making it harder to escape obligations. Work with your lender to restructure your loan, extend payback terms, reduce interest rates or monthly payments, or seek a forbearance agreement for a period of time. Banks as a general rule do not want to pursue collateral and normally prefer a workout that mitigates losses on both sides of the equation.</p><p>Q. What would you say to business borrowers?</p><p>A. When you plan to present to a bank, you must be prepared to comply with rigorous reporting procedures and ready to supply accurate cash flow and reserves statistics, realistic forecasts and other detailed documentation about your businesses to prove that you can remain in good standing with your lender and will continue to make loan payments. Borrowers must recognize that banks are cash-flow lenders.</p><p>Q. How can I be prepared to present to my bank?</p><p>A. Large banks and financial services companies that extend credit are using advanced data mining techniques to determine which demographic profiles should be targeted with specific financial products tailored to each market. Not all money products are for all people. Since a large portion of a credit decision is based upon the historical credit performance of the borrower and the utilization of credit scoring, do all in your power to maintain a high FICA score and a consistent, on-time loan repayment record. Not all borrowers’ ability and willingness to pay are truly reflected in their credit scores.</p><p>Q. What is the role of smaller banks today? </p><p>A. Regional and community-based banks are very good places to do business. They know local people and have money to lend. However, most consumers don’t know the difference between local and large commercial banks when it comes to understanding advantages and disadvantages. The regulatory environment for one bank, or bank type, might be different for another bank.</p><p>Q. What is the role of credit unions?</p><p>A. Once only targeting smaller depositors that big banks didn’t want, today credit unions are leveraging technology and their growing membership clout to provide an array of financial services – including mortgage loans – which they were unable to offer years ago. Each time there is a downturn in the economy, other categories of financial service providers gain market share, and credit unions are leading the way.</p><p>Q. How has globalization impacted banks?</p><p>A. Bank globalization means that these institutions are increasingly deriving their capital from many sources. This is good from the standpoint that such banks are typically more diversified and may not be heavily invested in any single loan type, such as real estate loans. Bank of the West, for example, is 100 percent owned by the French company BNP Paribas Group, the sixth-strongest bank in the world. HSBC, which is owned by a British firm, has billions in assets and a track record for stability.</p><p>Q. What is the role of the federal bank bailout money?</p><p>A. Federal TARP (Troubled Asset Relief Program) money offered to banks was intended to be in addition to capital already in hand. In theory, this was fine, but rules were not set at the beginning and procedures changed. Some banks have decided that TARP money would hinder their ability to manage their businesses, pay dividends, etc. Taking these funds also opened the door for increased regulatory scrutiny. This is why some banks have either refused TARP funds or returned them so they could return to traditional underwriting practices. </p><p>It is going to take time for the secondary mortgage market to rebuild itself and for banks to write off their problem loans. Meanwhile, many banks are still lending and have reported record loan underwriting levels, even during this downturn.</p><p>Q. Do consumers and businesses know enough about banking?</p><p>A. The banking process must be demystified for average Americans as well as small business operators trying to assess their risks. It is difficult for the consumers to determine the type of risk they are taking because – on the surface – there is no differentiation between financial service providers. Most people do not understand how the banking system works and how money moves around. If a loan offer sounds too good to be true, it probably is! </p><p>The dichotomy in all of this is that while the U.S. Treasury Department has been saying that money is now available to expand the bank loan process and get the economy moving again, regulators are telling us that they are tightening lending criteria making it more difficult to gain access to loans. The best advice I can give is to speak with your local banker or financial adviser first. He or she will probably be willing to help. For success it takes three things: preparation, preparation and more preparation.</p>