How to Avoid Being Blindsided by Today’s One-sided Banking Relationships
When times were good—arguably a short 18 months ago—outbound calls to individuals and businesses from their banks and banks they had never even heard of kept phones ringing off the hook. You remember the drill—easy money, easy credit, easy rates for the taking: “We value your business…we want to help you grow your business…how we can help you earn more on your checking/savings/deposit accounts? May we lend you 100%-125% of your home’s value through an uncollateralized, interest-only loan?”
According to a majority of my clients in recent months the only thing off the hook now is their banker’s phone when they happen to be the one placing the call!
But read on my friends because this is far more than a rant about the sudden demise of credit, liquidity and customer service in the banking arena. I want to provide you with some practical steps you can take now to avoid the type of adverse situations that some of my clients have faced recently in their banking relationships.
So where have all the banks gone…and the money? My clients are wondering so I imagine many of you are as well. Unless you are part of a work-out group—not a good thing these days—it seems bankers have either become an endangered species or have taken a page from Osama Bin-Hidin’ and are holed-up in a cave somewhere. Our federal government has stated on many occasions that there is money available to lend and it clearly understands the need for banks to infuse needed liquidity to help the American economy recover.
We all know that the days of easy credit are over. That’s old news. What’s making news today is the manner in which banks are turning the tables on their clients and changing the terms of loan agreements and other business arrangements without seeking or apparently requiring the consent of their customers.
I have been engaged in discussions with a large number of my clients in recent months who are seriously concerned about their banking relationships—or should I say lack thereof. Maybe banks define the term relationship differently than the rest of us…kind of like that fair weather friend relationship. As a financial advisor, I know a little something about relationship businesses. In any long-term relationship there will inevitably be ups and downs, but a commitment to be a solid “business partner” means consistently stepping up not just during the good times but when the going gets tough. It seems now that times have become tough; banks are folding up their proverbial three-ring circus tents and heading out of town.
Their excuse? They blame the regulators. The same regulators that made it possible for banks to experience record growth, expand into questionable and hi-risk endeavors and earn record revenues over the past 20 or so years. History notwithstanding, they are now using the regulators as their escape goat to lower the risk on their business books.
In the meantime clients representing long and profitable histories for the banks they do business with are more and more frequently facing little notice when it comes to losing access to money or lines of credit. In many cases lines of credit are being dramatically reduced and clients are being told to find a “new business partner” with little or no transition time.
What is startling to me when I hear these stories is the fact that in so many cases these things are happening to profitable businesses and individuals with good or excellent credit histories and a positive net worth—or dare I say it: money in the bank!
Without financing, companies who normally use banks to create leverage in their operations have limited capital to invest in growth-oriented activities, including job creation. In other cases, companies need help to get through a tough time. But banks, instead of working with their clients to turn lending into a win-win opportunity for both parties, are now choosing to abandon clients. Is this the kind of business partner you need?
Banks have long-held a privileged position in our Monetary System. They are a vital link to the health of our economy and exercise tremendous power when it comes to economic expansion and contraction. However, with this power comes equally tremendous responsibility and accountability. Without these, chaos and abuse is allowed to reign and good, hard-working Americans end up paying the price.
In one egregious case, a client of mine with a 10-year history as a private banking client with Dollar Bank, who was also a strong referral source for the bank and a commercial property client, was promptly given her walking papers in a less than ceremonious manner. With her permission, here is her story followed by tips on how you can avoid being blindsided by your banking institutions.
In the previous 8 years of her relationship with Dollar Bank, my client had no personal debt of any kind. The mortgage on her home had been paid off many years prior. Two months ago she and her spouse purchased a new home with a 70% down payment. They have never been late on any of their loans. Their two commercial properties maintain 95% and 82% occupancy respectively, and generate positive cash flow. They maintain 50% equity in one property and 35% in the other.
This is where the story gets interesting. While neither she nor her spouse had any personal debt, my client had two business lines of credit with Cognovit provisions. This is a type of note whereby automatic judgment is for the bank with no trial or arbitration period to learn the facts should you default on the note. There is an immediate presumption of guilt since the bank is the judge and jury if you are deemed by them to be in default.
The one note was a $100,000 line of credit which was used for a business venture two years ago. No principle was ever paid to date because of the startup nature of the one business. The other note was a business line that was used over the last 5 year period to help my client build and market her business which resulted in her business receiving coveted awards for business growth from a local business leadership organization for several consecutive years. The business line of credit fluctuated from zero to $100,000 throughout the 5 year period.
Last quarter she paid $40,000 on that line which is now at $60,000. She also took a significant pay reduction in 2009 to prevent laying off any employees. Instead of taking this excess profit as salary recoupment, she paid 40% of her business indebtedness to Dollar Bank.
Several weeks ago, she was asked to attend a “relationship meeting” with her relationship manager and the head of private banking for Dollar Bank in Cleveland. Dollar Bank was concerned about the outstanding $100,000 line that had never received a principle payment. The client agreed to term it out over 20 years (making principal and interest payments). However, the head of private banking refused these terms and demanded an immediate $35,000 payment plus collateral in the client’s new home.
My client responded, stating that she would never use personal assets to secure business assets. Hence, she had a $100,000 personal line she never used even when times were tough on her business.
Apparently, this enraged the private bank head and he told my client that she was not making wise decisions with her money. Instead of getting into a heated discussion—or listening to any additional unfounded insults that might be flung her way—my client abruptly ended the meeting. According to my client, her relationship manager sat there for the duration of the meeting, never speaking a word.
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