Why lenders are here today and gone tomorrow
Ever wonder why your favorite lender, the one you relied on for so many closings last year, is gone? They were doing so well and approving your deals. Lenders come and go every year and in today’s article I will tell you what happens to them and how to recognize the handwriting on the wall.
If you can remember a lender named CIT Small Business Lending then I know you will understand this article. For those not familiar with these three letters I will tell you. CIT was the number one non-bank SBA lender in the country for nine years running. They continued to win award after award for all the good they were doing all over America for small businesses. You read that right, 9 straight years they produced the highest level of dollars lent to SBA borrowers. At one time CIT had written about 80% of all Diamond Financial loans nationwide and their volume had just reached one billion dollars, just to put it in perspective. Initial thoughts would be that they had written too many borderline loans or had lowered underwriting criteria and hence paid the price. Surprisingly that is not the case at all and is almost never why we see a lender shut down operations in our market.
Let’s begin with the fundamentals of SBA lenders and the two things that separate the majority of them. Do they sell the loans or portfolio them. If a lender portfolios each request then this means they underwrite the loan knowing it will remain on their balance sheet for the entire loan term. We find that portfolio lenders are more conservative during the approval process and typically add additional requirements over and above the actual SBA rules and criteria. These lenders are typically banks (well capitalized) and may have an SBA division or just add SBA to their offerings as a way to service their existing customers. This method increases bank profits quickly and positions them as an acquisition target. If you haven’t figured this one out yet the bottom line on this scenario is they get sold and the new (usually larger) bank will not allow this type of exposure (goodwill transactions) to continue and within a few months the volume decreases or drops off completely. It begins with higher loan coverage ratios and increased credit criteria.
When a lender sells their loans and is able to profit from the sale they become more aggressive in underwriting and follow the SBA rules much closer. If the numbers work and the deal makes sense it will usually get approved by a non-bank lender if presented correctly. These lenders typically have backing from a bank that wishes to remain in the background but enjoy the profits produced by the sale of these loans. The reason for the separation is the balance sheet exposure that the bank would incur should these goodwill loans be added.
Now that we’ve touched on the differences between the two lender types let’s explore why they leave the SBA lending arena.
CIT, mentioned above, was basically forced out by a lack of capitalization once the selling markets collapsed in 2009. Their balance sheet was full of loans but without selling them, left them short of funds for additional requests. This market is tied directly to the mortgage market only as these are typically the same buyers that purchase both. Not being able to sell SBA loans in 2009 and 2010 crippled the non-bank lenders cash flow.
The financial crisis and lack of capital of this era was the first I had witnessed in my 20 plus years in the industry. Non-bank lenders were the hardest hit when referring to under collateralized, goodwill type SBA loans. This lack of capital is what caused most of these lenders to discontinue their programs immediately.
Now that we’ve expanded a little on SBA lenders let’s talk about some signs that will give you reason to be concerned. Here is a list of our top 5 signals that we may be losing a lender:
- Your contact/BDO left the organization
- A loan request that would normally be approved is declined
- The lender begins to ban certain industries
- The lending footprint changes
- Underwriting criteria begins to tighten and goodwill exposure levels are reduced
Once we witness this type of behavior and recognize the handwriting on the wall, we begin to phase out that lender. It is at this point that volume with this lender drops off. Here is where having multiple choices in aggressive lending comes into play. The sooner you discover these concerns and address them the sooner you can get your deal back on track and moving in the right direction.
The above reality is happening all around us in today’s market and the biggest challenge then becomes keeping your buyer and seller calm as they typically do not understand this process and begin to have concerns.
Once you recognize a lender is having issues the best line of defense is to move quickly. Sometimes it is best to act alongside the first lender in a parallel path with a second lender as a plan B. Do not sit and allow any lender to deliver a decline, stay on top and ahead always.