Ten traumatic steps to trouble in the Game of Loans

iron bank credit

I’m involved in another case supporting a client where their bank, sometime ago, suggested that they might like to look for another lender. Matters are now urgent and the client’s properties are now at serious risk.

It would be easy to dismiss this as a case of someone being a bad risk who has upset their bank and is perhaps deserving. Why would a bank behave like this?

Well the answer is that it can happen rather easily. As in so many cases that I’ve dealt with (successfully) the client is a high net worth customer of a Private Bank, and with a longstanding relationship.

Private Banks did have a habit in the past of lending money at fine rates on propositions that were a bit ‘bespoke’ – great at the time but in these days of regulation and capital weightings, such loans are expensive for them to keep on the books and cause them regulatory problems.

The trigger can also be a decision by the bank to change their ‘wealth’ or ‘income’ criteria for who they want banking with them.

It’s ruthless but its business – they kindly suggest to the client that they should start to look for another banker.

What happens next can be a ten-step path to serious problems – it goes like this:

  1. Private bankers tend to be decent people, the message might not be quite so assertive in the first step and the client will always ‘hear what they want to hear’. The message doesn’t quite hit home that they should really start doing something about this.
  1. This is followed by ‘denial’- ‘I’ve banked with them for years, surely they don’t mean it, surely they’ll change their mind or it’s just the new bank manager being awkward’ Nothing gets done.
  1. Deferring tactics follow – the client has a good deal. It will take time to rearrange it with another lender and cost money (arrangement fees and valuation fees alone will cost thousands of pounds) and it is possible that an alternative loan package might not even be available. The longer the client can delay the longer they can benefit from that low interest deal, often involving million pound loans (who wouldn’t hold out?)
  1. Stop talking to the bank – more pressure from the banker makes the client less inclined to communicate (although this proves to be like the child that puts on a blindfold and thinks this makes them invisible.)
  1. Meanwhile the bank is following a dogmatic well set out process. Step by step they will be moving down a path which could, in theory, ultimately lead to foreclosure and repossession/forced sale. The account is likely to be moved to a different manager who doesn’t have a relationship with the client and will be more objective about getting ‘the banks way’. The relationship becomes confrontational.
  1. At some point the client will realise it would actually make sense to talk to another bank. They may not already have a contact (many private banking clients have only dealt with one bank) and will find it hard to find the best person to talk to. They might at this point talk to their professional advisers (typically their accountant) for ideas or be introduced to a broker for help. One thing is certain; they will underestimate how difficult the task will be and how long it is going to take.
  1. Pride, anger, memory lapse or denial will lead to them not sharing the full story with the new bank or the broker who is trying to help them. As a result the urgency might not be appreciated. A refinance is normally possible for such clients (all banks understand that other banks act like this) however time is of the essence – the process could easily take 3 or 4 months to complete.
  1. The client gets ‘uglier’ to a new lender by the day. As the existing bank exerts pressure by increasing interest rates or returning cheques the clients’ accounts show signs of stress and their credit rating can easily be affected. It becomes harder to set up a loan with a new bank.
  1. The issue becomes urgent. The costs go up. The banks offering the best terms tend also to be the banks that are most pedantic in their processing and they will not compromise on their underwriting. They may reject a loan applicant just because their situation is deteriorating through the underwriting process. It then becomes necessary to find a lender who will act quickly or compromise on quality – they charge higher interest rates and fees to reflect the risk.
  1. There becomes a real risk of foreclosure if the client doesn’t get to ‘Point 6’ quick enough. A client with plenty of assets and income, a good reputation and banking history can find themselves in an expensive battle just because they didn’t react quick enough.

Do you have a client who might be at Stages 1 to 5? Could it be you?

My approach now is not just to find a new bank but to ‘project manage’ the whole process of moving from one to the other in a timely manner and minimising costs. Bankers themselves like the approach and clients are appreciative – but typically only after the event.