Lender taking annual personal credit reports on commercial loan!

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Lender taking annual personal credit reports on commercial loan!

Scott Price
Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes

Hi, I just ran into an unusual situation and was wondering what experience others have.  I have had multiple commercial loans over the years, and many now require a fresh set of financial statements, rent rolls, etc. every year.  That is understood and not a problem.  However, a new lender for me just initiated its first annual loan inspection process and, without my advance knowledge, they pulled "hard" personal credit reports on both me and my wife.  Personal credit reports were expected at the time of initial loan application, but they are now telling me they are going to do this every single year from here on out  since this is their policy for all their commercial loans.

This policy is rather disturbing on a number of levels.  Most importantly, hard credit report pulls reduce personal credit scores.  So, if this lender's policy were replicated by other lenders, the negative effect on commercial investors with multiple loans would be significant.

And a bit galling is the fact that this is a flawlessly performing loan with always on time payments, plus of course this is a commercial loan through a LLC and against the property and LLC (with personal guarantee as backup). Their intrusiveness on the personal side appears unwarranted, non-standard, and is detrimental to their clients' personal credit scores (especially for a fully performing loan).

Any thoughts or experiences on this from other investors who have commercial loans?

Thank you,

Scott

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Mark Creason
Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
10y

I can understand the creditor potentially running your credit report, but there is a method for creditors to pull a credit report on existing clients.  This pull would be a soft hit and would not affect your credit score.  Credit card companies do this routinely.  By running a hard hit, it appears to the bureaus that you are applying for new credit.  I am assuming that this loan is not callable or that it is some kind of arm that needs to be approved each year.  I would ask them to remove the inquiry as they did not run your credit for a permissible purpose.

Mark

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  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Scott Price

    I have a few commercial loans and they do not do annual hard pulls of my credit.  Similar to you, they did initially pull my credit when applying, and they do report to the credit bureaus monthly.  They also require annual paperwork (personal financial statement and tax returns).  

    I guess it's in the wording of your loan documents.  Start with that.

    Sorry to hear but wanted to share my experience if that helps!

    - Tom

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    This seems stupid,  but I'm not particularly knowledgeable about commercial financing.

    Are you folks signing loan paperwork saying that they can call the note due if your FICO falls below 680 or something? If not, what function does this serve? 

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Read  the mortgage carefully - - many ( mine too ) grants the privilege to pull reports and demand financial status updates 'periodically'.  I usually provide the YE-PnL for the property, but nothing personally.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    I'm still unclear on what the consequences are if they either don't like your new credit report or don't like your financial status updates. Can anyone help me understand this? 

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  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Tom S., thanks for the confirmation that you have shared the same experiences.

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  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Jeff B., yes sometimes the mortgage documentation on what the bank CAN request for information is expansive. That can make sense, primarily if they are in a non-performing loan situation and need to gather a lot of information. In this case, the closest thing to that is a clause that says "Borrower shall deliver to Lender such financial statements as shall reasonably be required by Lender, including..." and then it lists off a balance sheet, P&L, income tax returns, and all the other normal requests for financial statements. However, a credit report does not meet the definition of a financial statement in accounting terms, and doing something this industry-non-standard plus unnecessary is not "reasonable". The difference here is that they are using their option to do something highly unusual. Even if there was a weasel clause somewhere in the docs, the policy still is detrimental to their clients and unnecessarily aggressive and intrusive.

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  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Chris Mason, most commercial loan docs include requests for the ability to inspect financial documents (though not personal credit reports). There generally is not a direct cause-effect between the review finding something they don't like and it putting the loan in jeopardy. The lender generally does the review to proactively look for problem areas. They have the right (after due process) to intervene and protect the underlying value of the asset since it is the collateral for the loan. In most cases and in properly performing assets/loans, no or minimal questions come back. Sometimes there will be recommendations from onsite inspections, though their ability to force the borrower to perform all the recommendations is generally murky (especially if it is a fully performing loan). In this case, the theoretical justification for the lender pulling a personal credit report is that a significantly declining personal credit score may raise a red flag. The property plus loan would get more ongoing scrutiny than others, in case a person's personal issues spill over into a property's performance and the ownership LLC's operations, financials, maintenance, etc.

    But, again, in this case everything is fully performing plus the policy is highly irregular and moderately detrimental (if only done once) to their customer's personal credit scores.  Also, their policy is totally non-scalable.  If a commercial investor had 100 commercial loans with 100 different lenders, and every lender followed this particular lender's policy, then that investor's credit score would be crushed very badly due to no fault of their own.

    Best Regards,

    Scott Price

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    Hi @Scott Price,

    Thank you for that thorough answer.

    Please entertain a hypothetical for me.

    Your FICO goes down 100 points because you purchased drugs on your credit card, missed a bunch of CC payments, and the financials you provide are written on a bar napkin. You do not care about future loans from this lender, so when they ask for additional information or whatever, you do more bar napkin ********. Or maybe you have you accountant do the bare minimum to check the lawfully required boxes.

    What can the lender ACTUALLY do, given that you have a perfect payment history, other than deny future loan applications and pull your credit once a year to confirm that your FICO score is still below 500?

    EDIT: as a residential lender, nothing can be done. You could actually completely ignore all of these requests for information that wasn't available when your loan funded, and be perfectly OK.

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  • Al Wilson
    Investor · Daphne, AL · Member since 2014 · 1k+ posts · 242 votes
    10y
    All of our entity lenders require delivery of annual financial statements (or tax returns) from any individual who owns 20% or more of the entity. Standard stuff in our world. Good luck.
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  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    10y

    I can understand the creditor potentially running your credit report, but there is a method for creditors to pull a credit report on existing clients.  This pull would be a soft hit and would not affect your credit score.  Credit card companies do this routinely.  By running a hard hit, it appears to the bureaus that you are applying for new credit.  I am assuming that this loan is not callable or that it is some kind of arm that needs to be approved each year.  I would ask them to remove the inquiry as they did not run your credit for a permissible purpose.

    Mark

    1Reply
  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Chris Mason, as mentioned the lender is primarily interested in finding situations where their underlying asset's value or management is at significant enough risk for them to perhaps step in and ensure it's value and operations are properly maintained.  Theoretically the borrower would then be liable for any expenses the lender incurs in that event.

    That situation is generally the exception, and the lender is of course primarily concerned about on time payment of their loan.

    Best Regards,

    Scott Price

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  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Al Wilson, yes agreed that all the things you mention are standard.  I do them all the time for my commercial loans.  However, this addition of a hard credit inquiry is not a standard request nor is it a standard "financial statement".

    Thanks,
    Scott

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  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Mark Creason, that is an excellent point! Soft vs. hard credit inquiry seems to be where they have gone off the deep end of standard industry practice. A soft credit pull would still get the bulk of what they should really need to know (especially for a commercial loan that is through a LLC and against the property). If for some reason they found a huge year over year drop in credit score for an investor, they could then follow up with a hard inquiry report afterwards if they felt it was absolutely necessary. But that approach would not inappropriately and negatively impact personal credit reports/scores for most scenarios and for investors like myself. This is a flawlessly performing loan and I have terrific credit scores. They have no valid reason to pull a hard credit inquiry. Yet still they want to implement their current non-industry-standard approach because it is "policy".

    Scott

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  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    10y

    Scott,

    There is no difference in the information, just that an existing creditor can check on their loans.  I see a soft hit every month from Capital One on my credit report.

    Mark

    1Reply
  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Mark Creason, thanks.  Even more of a reason for them not to be doing their policy...

    Thanks,

    Scott

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    @Scott Price,

    Looks like yet another reason to not hold property in your own name, but rather in a properly protected business entity.

    I'll pass that along to the newbies in my investing group.

    David J Dachtera

    "Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
    - DJ Benedict

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    What a lender will require depends on what type of loan and rate you are getting and how long it is held out for.

    Lenders are investors and want the most security with the least risk especially if the lending rate is low and amortization is long.

    If you are getting 75 to 80% LTV commercial lenders heavily scrutinize everything. If the LTV is 50 to 60% many lenders will overlook a bunch of things because the LTV is so low on their first position.

    Common is for an investor to set up a new corporation for a property. The lender assigns no value to it as a newly formed entity for security. They will still want a personal guarantee unless the loan is a non-recourse loan. Even then there are carve outs for BK, fraud, etc. where it becomes recourse.

    Any pull not initiated by you directly or in an application or documents you signed should be a soft pull and not affect your score. If one or all of the 3 credit agencies is dinging your score you can challenge the inquiries online for removal as hard inquiries.    

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  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @David Dachtera, yes agreed on having an entity in a separate business entity. However, that is the way this loan is set up! The property is owned by a LLC, and the loan is to a LLC. The loan was originally set up to also have a personal guaranty, too, which is standard. The weird part here is that they are pulling hard credit inquiries. That is very unusual and unnecessary. If every lender did this for all of their borrowers, it would decimate people's credit scores for experienced investors with multiple properties.

    Scott

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y
    Originally posted by @Scott Price:

    @David Dachtera, yes agreed on having an entity in a separate business entity. However, that is the way this loan is set up! The property is owned by a LLC, and the loan is to a LLC. The loan was originally set up to also have a personal guaranty, too, which is standard. The weird part here is that they are pulling hard credit inquiries. That is very unusual and unnecessary. If every lender did this for all of their borrowers, it would decimate people's credit scores for experienced investors with multiple properties.

    Scott

    Then, that means your "Corporate Veil" won't protect you - or you've got a personal guarantee on the LLC's loan. Time to refi and get your names off the loan.

    David J Dachtera

    "Success is not a destination. Failure is not an event. Success is a process, failure is a choice."
    - DJ Benedict

     
    1Reply
  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Joel Owens, thanks for the inputs.  Agreed on all points, though to clarify: the issue here is not the personal guarantee.  It is the hard credit pull on our personal credit reports/scores every year.  The industry norm is for that to be done at time of application.

    Yes, good point on contesting the hard pull.  I may end up doing the hard pull, especially since it was not authorized and doesn't serve a good purpose.  They should have done a soft pull.

    Thanks,

    Scott

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  • Jonathan J. Miller
    Lender · Denver, CO · Member since 2015 · 275 posts · 35 votes
    10y
    Not all commercial lenders pull hard credit pulls. The majority are still more interested in the collateral. Hard pulls are usually a requirement for conforming market loans. ~J
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  • Scott Price
    OP
    Rental Property Investor · Coupeville, WA · Member since 2011 · 135 posts · 52 votes
    10y

    @Jonathan J. Miller, yes agreed. And most only do a hard pull at time of initial application, but not afterwards for annual check-ups. They are improperly sending a message to the world that I am applying for new credit in my personal loan, none of which applies to this commercial loan through a LLC that is not on my personal credit report...

    Scott

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