As a former Senior Commercial Loan Officer, I discovered a powerful paradigm to clear, complete and concise commercial loan presentations. In essence, you must begin your commercial lending process with the end (the closing) in mind using a broad understanding of commercial loan closings across a wide variety of commercial transactions.
In other words, you should begin your commercial loan presentations by asking yourself the basic question: “What is this commercial loan going to look like at closing?” Sounds simple enough, doesn’t it? However, it is not as easy as you think. For some commercial lenders, it’s an entirely new paradigm or way of thinking.
So where does your lending staff stand? Here is a management tool to evaluate your current commercial lending paradigm: Take a sample of the commercial loan presentations that your lending staff has recently submitted to your loan committee. Note how many first-time loan submissions were approved and closed based on the initial loan structure and cash flow analysis. Also determine:
· How many loans were restructured and resubmitted?
· How many approved loans actually closed?
· Which approved loans did not close and why?
· How many times were they resubmitted prior to closing?
· How many loans involved last-minute document waivers prior to closing?
· How many loans provided additional funding for other loans that fell short?
You may be surprised at what you find as you review your bank’s commercial credit culture from the initial loan presentations to the loan resubmission process within your bank. Is your overall commercial lending system efficient? Are your initial commercial loan presentations organized in a manner to forestall unnecessary and time consuming resubmissions?
Thankfully, visualizing a commercial loan transaction with circumspection is a skill that can be developed. Here are a few suggestions to help you break into a new paradigm of beginning with the end in mind to get your commercial loan committee presentations, cash flow analysis and loan closings right the first time:
- Personal and Corporate Guaranties. You have to know exactly who will provide guaranties for each loan request in order to prepare an accurate global cash flow analysis. How many loan officers rely on interviewing their prospective borrowers regarding ownership structure? Those that do are often surprised when the organizational documents come in. Identify and document ownership, guarantors and signers earlier in the commercial loan application process.
- Closing Costs. In order to determine the amount of cash the borrower brings to the closing table, you have to understand all of the commercial closing costs. Determine what closing costs will be rolled into the final loan amount before you submit your loan presentation. Unanticipated closing costs may prompt a loan resubmission to increase the proposed loan amount, and change the initial cash flow analysis and debt service coverage.
- Borrower’s Down Payment. Ascertain the borrower’s source of funds for the down payment before you prepare the initial cash flow analysis and loan presentation. Again, this is simple. However, if the borrower’s sources of funds for the required down payment are not documented initially, then the risk of a possible loan resubmission to correct the loan amount, cash flow analysis and debt service coverage increases substantially.
- Loan Disbursement. Think about how the loan will be disbursed at closing while you are preparing the initial commercial loan presentation. Will the way you intend to disburse the loan proceeds be consistent with your core system parameters? What if funding is delayed and disbursement costs increase? Develop a loan disbursement plan. Include paid-outside-closing backup plans for system delays and disbursement contingencies to be paid by the borrower.
- Loan Structure and Use of Proceeds. Together with the above described suggestions, the final loan structure should be itemized with a sufficient level of detail. Check that the loan proceeds are adequate to complete the loan transaction in light of your borrower’s loan purpose and closing costs. Constructing a basic commercial closing statement within the loan presentation helps commercial loan officers broaden their expertise across diverse commercial transactions.
Together with other loan structuring considerations, prudential regulators are requiring that repayment and remediation plans be evaluated and considered in adequately structuring commercial loan requests. Properly structuring a loan also includes finding ways to hedge the downside of a given business plan at the same time.
Performing a comprehensive collateral evaluation is important as well. For additional information, refer to my last article in The Bank Beat Newsletter entitled “The Collateral Analysis: 5 Keys to Meeting Prudential Regulatory Expectations.”
Every step of the Commercial loan application process, initial cash flow analysis and commercial loan presentation is an opportunity to plan your commercial loan closing in detail. Beginning with the end in mind increases your prospects for success for not only your borrower’s business lending needs, but also for your bank’s commercial credit culture.
Furthermore, Section 1071 of the Dodd-Frank Act added a new section – 704B to the Equal Credit Opportunity Act (ECOA) that will almost certainly require that you review your commercial credit culture at some point in the very near future. Proposed rules for additional commercial loan data collection and reporting are on the immediate horizon.
The new rules will essentially require that commercial loans, to minority and women-owned businesses and small businesses, be documented with a greater level of care and due diligence starting with the initial commercial loan application and loan committee presentation. Therefore, the new ECOA regulations and impending procedures may necessitate the begin-with-the-end-in-mind paradigm for commercial loan underwriting.
This general article is not intended to be a substitute for sound legal advice provided by experienced and competent legal counsel nor is it intended to apply to complex loan structures or more technical forms of lending such as construction lending. For more information, contact Gary Welsh, Loan Review and Compliance Manager, at gary.welsh@condley.cpa or 512-850-2041.
About Gary Welsh
As a manager for Condley and Company, L.L.P.'s Banking Services Group, Gary provides loan review and compliance services to financial institutions in the Abilene community. He has earned the Certified Regulatory Compliance Manager designation and is a Licensed Texas Real Estate Broker through the Texas Real Estate Commission (TREC). Click here to read Gary's complete bio.