presented by: osburn & associates, llc · program and the accounting department of a community...

Bank Lending in Today’s

Challenging Environment

Presented by: Osburn & Associates, LLC

Author/Instructor

DAVID L. OSBURN, MBA, CCRA

David Osburn, is the founder of Osburn & Associates, LLC that specializes in providing seminars, webinars, and keynote speeches to bankers, CPAs, attorneys, and credit managers on topics such as Banking/Finance/Credit, Negotiation Skills, Marketing, and Management.

David also functions as a Contract CFO and works with financial institutions, CPA firms, construction companies, and real estate developers. He is also an adjunct faculty member of both an accredited MBA program and the accounting department of a community college with over 30 years of teaching experience.

David’s extensive professional background encompasses over 19 years as both a Business Trainer and Contract CFO and 16 years in banking (commercial lending) including the position of Vice President & Senior Banking Officer.

David has an MBA in Finance/Marketing from Utah State University and a BS degree in Finance from Brigham Young University. He is also a graduate of the ABA National Commercial Lending School held at the University of Oklahoma.

David also holds the professional designation of Certified Credit and Risk Analyst (CCRA) as granted by the National Association of Credit Management (NACM).

Osburn & Associates, LLC

A Business Training & Contract CFO Firm

David L. Osburn, MBA, CCRA

Managing Member

7426 Alamo Summit Drive

Las Vegas, Nevada 89129

Direct: (702) 655-1187

E-Mail: [email protected]

Web: dlosburn.com2

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Bank Lending in Today’s Challenging Environment

I. Three Main Areas of Bank Lending

A. Consumer: An amount of money lent to an individual for

personal, family, or household purposes.

B. Mortgage: Loan transaction defined as a transaction in which a

mortgage, deed of trust, purchase money security

interest arising under an installment sales contract, or

equivalent security interest is created or retained against

the consumer's dwelling to finance the acquisition or

initial construction.

C. Commercial: Loan that is a debt-based funding arrangement between

a business and a financial institution, typically used to

fund major capital expenditures and or cover

operational costs that the company may otherwise be

unable to afford. (Private banking loans are usually

included in this category)

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II. Bank Retail Manager-Involvement in the Lending Process

A. “Full-Time” Lender: Extensive Lending + Retail Bank management

B. “Part-Time” Lender: Some Lending + Retail Bank Management

C. Loan Packager: Package Loans + Retail Bank Management

D. Loan Referrals Only: Refer Loans + Retail Bank Management

III. The Lending Function:

A. Bank Lending Defined:

Consumer Mortgage Commercial

1. Installment Auto loans, 30 yr/15 yr Equipment loan,

(Closed-End Credit) RV loans, CRE loan

HE loans

2. Revolving Lines HELOC N/A RLC

(Open-End Credit)

3. Other: Credit Cards, ARMs Letters of Credit

Personal (Standby +

Unsecured Comm’l)

Lines, Bill Con.,

Student Loans5

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B. Marketing Loans: “Determining the Need; Fulfilling the Need”


The Target Market: $35M Auto $200M Mtg. $750M Equip.

Loan Loan Loan

The Four Ps:

1. Product

2. Place

3. Price

4. Promotion

(Advertising &

Personal Selling)

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Advertising

a) Personal Appearance- First Impressions

b) The Business Card

c) Social Media

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Personal Selling- Yourself:

a) Negotiation Skills

1. The Hand Shake

2. Maslow’s Hierarchy of Needs:

Survival, Safety, Social, Self-Esteem, Self-Actualization

b) Communication Skills

1. Speech Patterns

2. Listening Skills

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C. Competitors:

1. Other Banks: Community, Regional, Large

2. Non-Bank, Regulated Entities

a. Credit Unions (including CUSOs)

b. Life Companies (CRE Lending)

c. Finance Companies

d. Others (Pay-Day, Title Lenders, Retailers-Amazon)

3. Non-Bank, Non-Regulated Entities

a. The use of the cell phone

b. Technology driven!

IV. The Five “Cs” of Credit aka Loan Underwriting”

(Assessment of “Individual” Loan Risk)

A. Capacity:

B. Capital:

C. Collateral:

D. Conditions:

E. Character:

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V. Using the Five “Cs” of Credit to Make Loan Decisions

A. Capacity (Cash Flow):

Consumer Mortgage

1. Debt to Income (DTI) Ratio:

2. DTI Ratio: Ex. 43% max, 36%-39% max

a. “combined” vs. “house”

b. comm’l lending application

3. Discretionary Income:

4. Credit Scoring: Ex. FICO 350 to 850

Commercial: EBITDA (Minimum DCR = 1.20X) (See below)

Credit Scoring: Ex. 160

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A. Capacity (Cash Flow): (Continued)

EBITDA (Traditional Cash Flow)

EBITDA $1,200M

Less Debt Ser. (P&I) 500M

Margin $700M

DCR 2.4X

EBITDA= Earnings + Interest Expense + Taxes + Depreciation +

Amortization (as derived from the Income Statement)

Note: Most lenders want to see a minimum company DCR of 1.20X.

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Personal Cash Flow (Business Owner/Guarantor)

Salary + Business Income+ $500MRental Income + K-1 Pass Through, etc. = Total Income (derived from

1040 tax return)

Less: Federal & State Taxes 150M

Cash Flow Available $350MFor Debt Service

Less: Debt Service (P&I) (derived $200Mfrom PFS)

Margin $150M

DCR 1.75X

Note: Most lenders want to see a minimum guarantor DCR of 1.00X-1.40X

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Global Cash Flow

Business Cash Flow + Personal Cash Flow (Business

Owner/Guarantor)

Business Cash Flow:

EBITDA $1,200M

Less: Debt Ser (P&I) 500M

Margin $700M

Personal Cash Flow:

Cash Flow Available $350MFor Debt Service

Less: Debt Service (P&I) 200MMargin $150M

Combined Margin $850M

Combined DCR 2.21X

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B. Capital (“Debt Level vs. Equity”)

1. Equity in the “Deal”

2. Source of the Equity? (Savings, Real Estate Appreciation,

“Gift” Letter, Cash Reserves)


Auto Loan Conventional Equipment Loan

(30 yr fixed; 15

RV Loan yr fixed; 5/1 ARM) CRE Loan

HELOC FHA (Related Concept:

Company leverage

as determined by

Debt/ Equity Ratio,

using the Balance

Sheet)

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C. Collateral (Assets Pledged)

Consumer

Auto Loan: Down Payment? 100% Financing? New/Used Car

RV Loan: 75%-85% max LTV?

HELOC: 75%-85% max LTV?

Mortgage

VA loan: 0% Down Payment ; No PMI

FHA loan: 3.5% Down Payment (FICO Score: 580+);Yes PMI

10% Down Payment (FICO Score: 500-579); Yes PMI

Conventional: 20% Down Payment; No PMI

Commercial

RLC: 75%-80% of “Eligible” A/R; 50% of Inventory

Equipment: 0%?, 10%?, 20%? Down Payment (SBA 7A loans)

CRE: (SBA 504 Loan) 10%; Conventional (20%-25%?) Down Payment

Other: “Key-Person” Life Insurance

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C. Collateral (Continued):

1. Personal Property: Vehicle Title, UCC-1 filing on FF&E (Blanket vs.

Specific filing)

2. Real Property: Mortgage Deed/ Trust Deed

3. Other Real Property (Real Estate) Issues:

a) Purchase Money vs. Refinance Situation

b) Owner Occupied? (CRE Lending)

c) Collateral Position (1st, 2nd Mortgage Deed/ Trust Deed)

How can the bank lose its collateral position?

d) Changes in the Real Estate Market (Demand/ Supply)

(residential & commercial)

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D. Conditions (Economic Influence):


Local:

Regional:

National:

International:

Other: Main Component of Gross Domestic Product (GDP) is

Consumer Spending (Consumer, Mortgage, and Commercial

Lending all support Consumer Spending)

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E. Character (Willingness to Repay):

How do we assess Character without being biased?

Consumer: FICO Score, Payment History with our Bank

Mortgage: FICO Score, Payment History with our Bank

Commercial: Banking Relationship, Direct Credit Checks,

Reputation, FICO Score

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E. Character (Willingness to Repay) (Continued):

Approximately, 35% of the FICO score is based on payment history!

FICO considers five different factors, as follows:

1. How has the customer handled credit (otherwise known as payment

history).

(Avoid past dues, collections, charge-offs, repossessions,

foreclosures, liens, judgments, and bankruptcies)

2. How much does the customer owe.

3. How long has the customer had credit.

4. How much new credit does the customer have.

5. What types of credit does the customer have.

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VI. The Lending Process:

A. Direct vs. Indirect

1. Direct: Consumer, Mortgage, Commercial Lenders

2. Indirect:

Consumer: Partnering with Auto Dealers, Retail, etc.

Mortgage: Secondary Market

Commercial: Loan Participations

B. Other Related Types of Financing:

1. Floor Plan Financing

2. Leasing

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VII. Loan Structure


$35M Auto $200M Mtg. $750M Equip.

Loan Loan Loan

A. Borrower’ Needs

B. Type of Loan:

Open-end or Closed-end

C. Term of Loan

D. Pricing: Fixed or Variable Rate

(plus loan fees, doc fees)

E. Collateral

F. Other: Automated Loan Payments?,

Credit Insurance Protection?

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VIII. Loan Support

A. Consumer Loan ($35M Auto Loan)

1. Promissory Note

2. Title to Vehicle (Bank named as Lien Holder)

3. Insurance in Place

B. Mortgage Loan ($200M Mortgage Loan)

1. Promissory Note & Mortgage Deed/ Trust Deed in Place

2. Value Established via Appraisal


C. Commercial ($750M Equipment Loan)

1. Promissory Note, UCC-1 Filing on FF&E

2. Value Established via Appraisal


4. Guarantee

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IX. Loan Documentation

A. General:

1. Complete all documents- per bank policy and

state/federal law

2. Prepare all documents in an efficient, accurate,

and professional manner (and try to avoid “rework”)

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B. Contract Law: Applied to Consumer, Mortgage & Commercial Loans

Promissory Note (Contract)-Legal Basis:

1. Offer & Acceptance (genuine mutual assent aka the “meeting of the minds”)

2. Legal contractual capacity:

a. Minors

b. Drunken/drugged individuals

c. Insane persons

3. Consideration (of value) (Ex. 20% rule)

4. Must be legal (Federal law vs. State law- “marijuana issue”)

5. Must be in writing (sale of land, guarantee other’s debts, more than one year, over $500)

IX. Loan Documentation (Continued):

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IX. Loan Documentation (Continued):

C. Documentation Examples:

1. Consumer: Closed-End, Fixed Rate Ex. Auto Loan

a. Promissory Note

b. Security Agreement (and vehicle title)

c. Truth in Lending Act (Reg Z) Disclosures

APR, Finance Charges

d. Insurance Policy

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2. Consumer: Open-Ended, Variable Rate: Ex. HELOC

a. Promissory Note (with appropriate disclosures)

b. Mortgage Deed/ Trust Deed

c. Rescission Notice (3 days)

d. Title Search

e. Appraisal

f. Flood Determination (100 yr/ 500 yr)

g. Insurance Binder/ Certificate

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3. Mortgage: Closed-End, Fixed Rate: Ex. Fixed Rate Mortgage

Closed-End, Variable Rate: Ex. Variable Rate Mortgage

a. Promissory Note:

(TRID Disclosures-use of software to track dates)

b. Mortgage Deed/ Trust Deed

c. Title Search

d. Appraisal

e. Flood Determination (100 yr, 500 yr)

g. Insurance Binder/ Certificate

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4. Commercial: Open-End, Variable Rate Ex. RLC

Closed-End, Fixed Rate Ex. Equip. Loan, CRE Loan

a. Promissory Note

b. UCC-Filing, Mortgage Deed/ Trust Deed

c. UCC Search, Title Search

d. FMV Established (Unsecured, BBCs) (Appraisal, F/Ss) (Appraisal)

e. Flood Determination (100 yr, 500 yr)

f. Insurance Binder/ Certificate

(See Commercial Loan Documentation: Exhibit # 1 and # 2)

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X. Closing the Loan

A. Ensure that the customer understands “how the

loan works.” The lender’s role as an educator!

1. Consumer: HELOC

2. Mortgage: Loans Sold

3. Commercial: RLC

B. Create a positive image for the bank

C. Use the opportunity to “cross-sale” other bank products

(marketing efforts)

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XI. Monitoring the Loan

A. Items to be Included in a Tickler System:

B. The Use of a Tickler System

Automation versus Human Input/ Involvement

C. Servicing: Follow-Up, Follow-Up, Follow-Up

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XII. Loan Compliance

A. Regulations

1. Equal Credit Opportunity Act (Reg B): Applies to All Loans!

Prohibited Basis:

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XII. Loan Compliance (Continued):

2. Truth in Lending Act (Reg Z)

3. RESPA (Real Estate Settlement Procedures Act)

a. TILA-RESPA Integrated Disclosure (TRID) Rule

b. Truth in Lending Act (TILA)-Real Estate Settlement Procedures

Act (RESPA)

Consumer Financial Protection Bureau (CFPB) (Dodd-Frank Act)

4. BSA (Bank Secrecy Act): CTR, SARs (On-Line)

5. Fair Credit Reporting Act

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XIII. Loan Collection Process:

Consumer, Mortgage, Commercial

A. Why Past Due?

1. Borrower has Unexpected Problems (legal issues, change in

management, death, disability, etc.)

2. Economic Downturn

3. Poor Money Management/ Employee Theft

4. Other: Marital problems, substance abuse, etc.

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B. Loan Collections- “Initial” Remedies

1. Payment Collections (See Below)

2. Modify the note-extensions, etc. (How flexible will the bank be?)

3. Refinance (May improve the bank’s collateral/ cash flow position)

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C. Loan Collections- “Initial” Remedies (Continued)

Fair Debt Collections Practices Act: How Hard Can You Push?

(Third-Party Consumer Credit Law)

1. Postcard

2. Represented by an attorney

3. Time: 8am-9pm (Based on Borrower’s Time Zone)

4. Place of Employment (With Permission Only)

5. Not communicate with other parties

6. Refuses to pay, cease to communicate

7. No harassment:

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D. Serious Delinquency Collection “Strategies”

1. Wage Garnishment (25%-33% of gross wage)

2. Right of Offset (What about “joint-accounts”?)

3. Repossession (How hard is it to “grab” and “liquidate” the

collateral?)

4. Seeking a judgment (collect on the judgment?) (Two lawsuits)

5. Fee Simple Foreclosure vs. Judicial Foreclosure

E. Other Real Estate-Related Issues:

1. Short-Sale

2. Deed in Lieu

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A. Consumer:

1. New $125,000 RV, wants 15 year amortization, low interest rate,

no loan fees paid

2. DTI Ratio = 30% including new loan payment

3. LTV = 95%

4. Borrower is 73 years old and has FICO score = 825

XIV. Real Life Loan Case Studies (Front-End)

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XIV. Real Life Loan Case Studies (Continued) (Front-End)

B. Mortgage:

1. New $250,000 mortgage loan, customer wants low interest rate and

little money down

2. DTI Ratio = 40% “combined”; 36% “house”

3. FICO score = 675

4. Note: Customer filed BK Chapter 7 four years ago due to medical bills

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XIII. Real Life Loan Case Studies (Continued) (Front-End)

C. Commercial:

1. New $250,000 RLC request

2. Borrower has been in business for 8 years

3. DCR = 1.18

4. LTV = 90%

5. Guarantor has personal FICO score of 625

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XIV. Real Life Loan Case Studies (Back-End)

A. Consumer:

1. New $25,000 auto loan has been in place for 12 months, with

two 30 day “lates”

2. Borrower has approached bank to extend terms of loan by 12

months to lower payments (Original loan was for 48 months)

3. Original LTV=85%, current LTV=75%

4. Consumer’s original DTI was 40% and FICO score was 685

(current DTI is 39% and FICO score is 665)

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XIV. Real Life Loan Case Studies (Continued) (Back-End)

B. Mortgage:

1. Borrower going through divorce and $50,000 HELOC is past

due 2 months

2. Borrower approaches bank to consolidate HELOC into

“regular” mortgage

3. Current LTV = 76% (including mortgage and HELOC)

4. Borrower had original FICO score of 705; current FICO score

is 665

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XIV. Real Life Loan Case Studies (Continued) (Back-End)

C. Commercial:

1. Borrower is running 1 month past due on “owner-occupied”

office building loan

2. Business was recently impacted by a $150M embezzlement by

the company’s former controller

3. LTV = 65%

4. Owner is requesting an “interest only” period for 6 months

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XV. Other Lending Issues:


A. Loan Pricing Models

B. Loan Rating Systems

C. Portfolio Management

(Identifying “Portfolio”

Risks)

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XVI. Conclusion:

Bank Lending in Today’s Challenging Environment

A. Competition (bank and non-bank)

B. Changes in the Market (technology, changes in “real estate” and other market demand/ supply)

C. Loan Quality (effective loan marketing, underwriting, documenting,closing, monitoring, and collections)

D. Loan Portfolio Management (big picture)

presented by: osburn & associates, llc · program and the accounting department of a community...

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