AUGUST 26, 2001
Posted by Eric C on August 26, 2001 at 10:39:16:
Banks and other institutions get sloppy during periods of extended (credit) expansion. New markets, business mergers, vested stock options and the philosophy of GAAC (growth at any cost) seem to be the focus. Paperwork is given short shrift at best. Those who are seen to "produce" (loan officers, executives) for the bank are rewarded generously; this will not include any of the "paperwork people".
This is a good time to be a borrower. Money flows freely and often small cracks in your credit profile (or Fair Isaac score) are ignored. Of course, during this period all credit flaws are small ones. If you can fog a mirror, you can get a loan.
But when a "credit squeeze" or "slowdown" threatens (or actually occurs) everything, especially those activities that take place behind the business curtain (backroom) functions, comes to a screeching halt. And it can get ugly quickly.
One of the reasons for this is those "backroom" folks are usually the last to be hired or rewarded but the first to get a pink slip. It's only after they're gone someone eventually asks the crucial question -- where did all the loan docs go? (best sung to the tune of "where have all the flowers gone?")
Now is when funding percentages begin to change dramatically. Many may be called (to try to refinance, etc) but few are chosen (actually close a loan). Truly high growth areas may not see much of this, but it is still happening right under their noses.
But there will also be some that fortune will smile on -- nobody can find their loan docs. Anywhere. Not the initial loan, not the secondary paperwork (shifting responsibility to someone else), nothing. Now what?
Upstream lenders, regulators, and the headquarters have been known to be most unforgiving to anyone suggesting that paperwork is no longer in their possession. And you don't want to know what happens if they actually find our that the paperwork was NEVER done.
Often, lending privileges are restricted (if not extinguished) and sooner or later, a new lending officer emerges. Behind the scenes there is much anguish.
“Paperwork teams” are sometimes recruited to fly around gathering paperwork, rewriting docs, etc. They are usually just ahead of internal (or federal auditors).
Please note that no banking institution will admit to this perverse cycle. Trust me, it happens all the time.
I've personally witnessed it in the '79-'80, '86-'88, and '90-early 93. I see signs of it happening all over again. Remember the old real estate proverb about our business consisting of ten year cycles and people with five year memories? It takes both for it to work, doesn't it?
These times are good for me. Bargains abound. People often move quickly from concern to panic and I am paid handsomely to show them to the exit door. Sort of a toll booth on their way to financial peace of mind.
I should note here that I went straight. I have never been nor do I aspire to be a banker. But I need them and I understand them. Kinda of a predator-prey relationship (and not the way they think)at times, but it can even get warm and cozy at others.
One more thing, this cycle can and does occur when banks buy out (or merge with) competitors too. Outwardly, great pains will be taken to illustrate that “nothing has changed”. But this is far from true. The new institution will always become a clone of the successor. The relationship you had, or thought you had with your loan officer, executive, etc is now out the window. They serve a new master now. And those who cannot or will not serve willingly have to go elsewhere. Don't let them take your credit line (or relationship) with them.