Combating Loan Fall Out by Marcus M. White

In the lending industry we spend a great deal of time building business relationships and performing product analyses for our client?s financing needs. The last thing we want to occur after spending months researching funding options, getting approvals, gathering supporting documentation and submitting packages to underwriters is for the deal to fall through; also, commonly known as ?fall out.? Many times loan officers find themselves bewildered because the loan scenario makes sense. Why can?t it be closed? What could have been done to preempt the fall out? How could expectations have been managed better? How will the fall out affect the relationship with the borrower(s)? It is very important to know when to sever the ties with these flailing loans. Understand when you have truly exhausted all reasonable avenues and move on to the next loan scenario. Otherwise, you will create a ?blockage? in your profit pipeline and possibly frustrate your client even more. Spending too much time on any one deal will ultimately hinder your marketing efforts and bring your hourly rate way down! Communication The number one reason that many deals fall out is lack of proper communication between the lender and client. Where exactly the breakdown occurs is a moot point if the deal goes sour. Learn to be attentive to the borrower?s needs. Maintain contact 2-3 times per week initially and at least once per day in the two weeks preceding the close date. Reiterate the clients? needs back to them and ask them why they are pursuing one particular option if others are available to them. Sometimes borrowers request certain loan products because they are familiar with them, or someone they know recently received a similar deal. Demonstrate why you are the loan expert by outlining all the pros and cons to every option and why they should consider one over the other based upon their specific financial goals. "Often times applicant's walk into the loan process with unrealistic expectations." says Charles Kapur, Assistant Vice President, Virginia Commerce Bank. "It's up to the loan officer to counsel a client and draw a map of the process.? Additionally, everything that may be required in order to reach the end product should be disclosed up front. Lender Fees Loan officers should always present lender fees in a timely fashion and prepare the borrower for the possibility of unforeseen costs associated with things such as special appraisals, broker charges, title liens, etc. If you?re dealing with ?hard money?, bridge or mezzanine loans, the fees are typically higher and sometimes require an equity position as a condition of financing. If a client is not aware of these features, the loan could very likely fall out. Again, managing expectations early on will prevent many delays in the process. Fair and honest fee structures will make asking for repeat business and referrals much easier. In order for the borrower to make a clear determination as to whether or not a particular financing option is suitable for their situation, they must be aware of all the specifics of the respective funding program. Credit A credit report is generally requested early in the pre-approval process of an application. However, the time from the pre-approval stage to the close date may span from 30to 45 days or even more in some cases. Therefore, it is critical that you advise your clients to monitor their spending habits, payment histories, etc. A loan program may require certain debt service coverage ratios (DSCR) and any new debts could cause the deal to fall out. Explain the importance of maintaining debt ratios with the borrower from a loan perspective as well as from a financial planning perspective. You should also advise clients to keep their revolving lines of credit below 50 percent of their available lines. They may actually see an increase in their credit rating before the loan closes which could subsequently result in a lower interest rate. Appraisal How many times do we happen upon a property owner who sees more value in his/her property holding than the actual true value? Generally, their perceived value is based on intangible items, such as sweat equity, the length of time the business has been in the family or comparison of the sales price with the business ?across the street.? The commercial appraisal is extremely comprehensive, expensive and can take upwards of a month to complete. An uneducated borrower may not understand the timeline if it is not articulated well and early on in the process. Rarely are any two commercial buildings the same and the property?s income is a major factor in determining its overall value. Prepare the client for the likelihood of lower than expected values. Additionally, construct alternative plans that incorporate higher loan to values (LTV) in addition to the plans for the optimal return on the appraised value. Being able to present options despite the actual appraised value not only demonstrates a value added service and benefit, but will give you other opportunities to engage your client during the tedious appraisal inspection process. Conclusion There are never any ?sure things? when dealing with loan scenarios. Even a ?clean cut? residential, Fannie Mae Loan could fall out. The best anyone can do to preempt as many problems as possible is to be prepared for the worst case scenario. More importantly, prepare the client for the worst case scenario. Ultimately, everything reverts back to proper and frequent communication, management of expectations, full disclosure and due diligence. Although fall out is a bitter pill for both you and the client to swallow, they will respect you more and value your efforts if you take them on the journey with you versus meeting them at the finish line. Marcus M. White is a Sr. Mortgage Banker & Manager at Dynamic Capital Mortgage (formerly Pinnacle Financial Corp.), a national residential and commercial lender in Vienna, Va. White is a published author and featured speaker in various media outlets and classrooms. White is a Certified Mortgage Planning Specialist (TM), financial counselor and former institutional investor, representing clients in complex financial matters. White has significant expertise in sophisticated financing transactions, retirement and investment planning. Contact White at [email protected] or (202) 210-0089.