Bank's unethical techniques - what to do?

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Bank's unethical techniques - what to do?

Tomasz Banas
Real Estate Investor/Agent · Brick, NJ · Member since 2014 · 49 posts · 9 votes
I got one condo under contract (buy & hold). After receiving the condo questionnaire I found this condo is a non-warrantable. I was able to find a local bank by searching for properties that closed in the same complex in last 12 months and owner's address is different than the property's address (most likely an investor). By filtering it down this way I looked who financed it and Voila! First, I provided them a condo questionnaire to make sure they are 100% ok with the condition of the complex. They confirmed it's ok. During the process I was informed that the president of the bank (its a small bank with 7 locations) is interested in a long term relationship and would appreciate if I bank with them and not just get a loan. I said I will be happy to consider but I am not ready to move my banking as I don't like to get pregnant at the first date. They did not have a problem with that. On Friday, I received an email: "The President has the Loan Underwriting on his desk. He wants to know if you will move over your business account to the Bank if he approves the loan." I did not change my position and reminded them what we talked about 2-3x. I said I will be happy to open savings account for security deposit and checking account for that property. Here's the reply I received: "Oh yeah, I remember! But here’s the thing, the President will not approve your loan unless you bring your business account over in addition to those other accounts." I was extremely surprised and sent them a long response regarding their technique. 3h later I received an email directly from the president: "I am not interested in doing the loan unless I know that I will have a deposit banking relationship that is satisfactory and acceptable. The bank has slowed down its lending in the market as to this product and is considering the requests based on the value of the deposit relationship. At this point, I thank you for considering our bank, but we will pass on this commercial mortgage opportunity." How can they go through the whole process including a verification of my financial information and come up with something like this right before providing a mortgage commitment? I am obligated to provide a mortgage commitment by 3/15. If not, I'm going to lose this deal. Seller has multiple cash offers $10k higher than my approved offer. Please help! Thank you in advance!
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Ann Bellamy
Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
9y

@Tomasz Banas, this is not "whatever it takes to get a deal".  This is just normal business practice.  In fact, it is probably just a given for them, and you are blowing it out of proportion, in my opinion.  

There are lots of requirements in the business world that aren't immediately disclosed, because it is either such common practice that it's not worth mentioning, or it is considered to be not terribly significant in the early stages of the conversation.  This is probably the former.

Here is an example:  Most hard money lenders require that you close with their title company.  In fact, when you get a mortgage from most banks, they choose the closing attorney or title company.  Very common practice, at least in my geography.  Think about it:  When you got your first mortgage, even on your own residence, and you got approved for financing, you didn't go out and search for a title company, you were told by the mortgage company as to which title company or attorney would be handling the closing.  

Is this disclosed up front on their website somewhere, or in the paperwork?  No, because it's not worthy of mention and is common practice.  

In fact, the more experience you get, the more of these "issues" you will run into.  This is why some people won't work with beginners, because educating them takes major effort.  I am guilty over the years of drawing a line in the sand also, and in retrospect, from the viewpoint of decades later, I was wasting time, emotional energy, and relationships. 

No one here is telling you to run from your bank, or even move your account.  Simply add another account and open up another relationship.  Don't sweat the small stuff.  This is small stuff.

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    9y

    From the OP's post, he was told several times that the bank "...is interested in a long term relationship and would appreciate if I bank with them and not just get a loan..." and according to the OP that makes the bank unethical.

    How is this unethical? Honestly, the OP doesn't 'get it'. It's business. And if the OP doesn't want to perform what most, frankly, would consider a small act towards developing a relationship... why would the bank want (using the OP's language) to go out on a second date? The OP's own words show that the bank didn't turn him down until the OP (his words) "...sent them a long response regarding their technique...", and that technique being developing banking relationships.

    I don't see how this is unethical.

    5Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    9y
    Originally posted by @Patrick Connell:

    P.S. The title of this thread in incredibly misleading because there's nothing unethical going on here.

     The OP did not give the timeline or enough detailed information.  However if the bank said "yes we are OK with making the loan even if you don't have a deposit account with us" and then went back on their word at the last minute, that could certainly be considered unethical. 

    I agree with your other points. However just because this is common the banking industry and as a practical matter, we have to deal with in the best way we can. That does not make it ethical.

    0Reply
  • Patrick Connell
    REALTOR® · Bastrop, TX · Member since 2013 · 324 posts · 191 votes
    9y
    Ned Carey based on the information available at the time of the post, I don't see anything to indicate there's anything unethical going on in the slightest. And this practical seems practical and ethical, I'm not sure which part of the practice could be considered unethical; with the exception of saying one thing and then doing another.
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Ned Carey  its also common in small banks to take your request to loan committee.. you can have your loan officer tell you it looks good etc etc.. then shot down at loan committee... nothing unethical its how these banks work. 

    Usually though a good banker will not take you to loan committee unless they are 99% sure its a go.

    I had this experience last year in Charleston on a 1 million dollar construction line.. Account rep No problem you guys are super strong you have build and sold 24 homes in Charleston in the last 2 years etc etc  made money on each and everyone of them...

    Only to get turned down at loan committee  ( why) I live in Oregon and they were not comfortable lending to out of area developers.... First time in my career I got shot down at Loan Committee but it does happen apparently as it happened to me.

    Now I went through the same thing this year with a different commercial bank in Charleston and got approved at loan committee and we are on our 6th new build together in the last year... Every time I am in town I go to lunch with our banker  We show him our projects why we are there... its so critical to have those personal relationships if you want to borrow any serious money form local banks.

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    9y

    I've posted in BP before that for many banks, you can actually tell what they are going to do by their SEC filings. For instance, the bank I posted about says this in their 10-K:

    Loan Portfolio

    We have a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in our markets. This policy relates to loan administration, documentation, underwriting, approval, and reporting requirements for various types of loans. The policy is designed to comply with all applicable federal and state regulatory requirements and establishes minimum standards for the extension of credit. The lending policy also establishes pre-determined lending authorities for loan officers commensurate with their abilities and experience. In addition, the policy outlines authorities for approval of credit requests at various lending amounts. This includes the Executive Loan Committee, comprised of the Chief Executive Officer, the Chief Credit Officer, and three non-management directors, and the Board of Directors that reviews the largest requests and requests that fall under Regulation O. Approval authorities are under regular review and are subject to adjustment. Loan requests outside of standard policy or guidelines may be made on a case by case basis when justified, documented, and approved by the appropriate authority.

    Underwriting criteria for all types of loans are prescribed within the lending policy. ...

    Commercial Real Estate...

    ... Past experience of the customer with the Bank

    Emphasis mine.  My local bank manager (Scott) invited me to a local fish fry several years ago. He said (paraphrased) 'Chris, you should come on over...' Did I go? Damn right. I took my significant other, too. Scott introduced me to the Bank President and CEO. How did I know to be there? Here's what it says in the 10-K:

    To enhance a positive image in the community and support one of the Bank's values, we participate in many local events, and our officers and directors serve on boards of local civic and charitable organizations.

    It's not that hard to figure out. Do your homework. Know what it takes for the bank to say 'Yes.' It works better that way.

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    9y

    It sounds like the OP is getting a nice lesson in The Golden Rule:

    -He who has the gold makes the rules

    What can you learn from this situation?  One good thing would be to organize your balance sheet such that you're not susceptible to games like this.  Another thing, which was mentioned previously, would be to get a line of credit to use as a bridge facility or keep ample cash reserves to make the original purchase on your own.  

    Unless there is some covenant in the loan you can simply move a lot of cash to get the deal done and then move it back to one of your other banks.  I bank with about 15 banks now because of issues like this.  The banks know the deposits and lending will go elsewhere if they f around with me.  If you deal with small banks long enough you'll find that the lender you build "the relationship" (laugh!) with will move to another bank at some point.  You'll also experience them pulling your interim construction loans because their allocation gets full or they decide to shift their portfolio in another direction.  

    This is why you need to do the hard work to line up financing BEFORE it is needed. Everyone wants to consider financing something that happens at deal time. This is the exact wrong way to do business. You should consider sourcing equity and debt part of your regular business practice. I'm lining up a $1M LOC right now and have absolutely zero need for it. I also do meetings with investors every week to develop relationships for capital before they're needed.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Chris Martin  you got it Chris  I play golf at least 3 or 4 times a year with my banks pres  and chief credit officer and my personal banker of 20 some years is head of all the lenders.. he has only kept about 5 retail clients and I am blessed to have him keep me on board.

    Community banks are just that community banks.. they support the community.. they are not retail banks looking for checking accounts for minimum wage earners who pay through the nose for checking products.. I pay ZERO for anything.. LOL  regardless of minimum balances etc.

    Any way....

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  • Ed S.
    Investor · Oskaloosa, IA · Member since 2014 · 126 posts · 65 votes
    9y
    Great, Great discussion. It's ALL ABOUT relationships, be it a banker, realtor, carpenter, etc. I love reading all the postings. Remember to be gentle; we all learn from each other, and our experiences. Us old timers were newbies at one time too!
    1Reply
  • David MacClintock
    Investor · Oneonta, NY · Member since 2015 · 57 posts · 27 votes
    9y

    I keep open accounts at 7 different banks just so that I can show I have a relationship with them when I request something. I have never used it for a bank loan and don't intend to in the near future but it costs me nothing for this. I opened all of these accounts when I was doing Preservation work as a few of them required it for contracts and for the others I used who ever opened my account to get me further up the chain to inquire about preservation opportunities. Just open the account and move funds in, it takes 20 minutes.

    2Reply
  • Bob T.
    Humble, TX · Member since 2017 · 1 post · 1 vote
    9y
    I've been in banking for over 25 years. This is VERY normal. It happens all the time at big & small banks. To make this deal worthwhile to the bank they want you as a deposit customer. Absolutely nothing wrong or unusual about this request.
    1Reply
  • Matt H.
    Real Estate Broker · CA · Member since 2016 · 243 posts · 226 votes
    9y
    9 times out of 10 I have to open a business checking with the banks I get loans with, and usually mortgage payment has to be paid from there on auto debit or they bump my rate. It's annoying, but not unethical, just the cost of doing business.
    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    9y
    Originally posted by @Patrick Connell:

    And this practical seems practical and ethical, I'm not sure which part of the practice could be considered unethical; with the exception of saying one thing and then doing another.

    Exactly, it is the misleading of the customer that is unethical.  

    The policy of requiring opening accounts to get a loan is perfectly reasonable and practical as you said. All the advice about: he who has the gold makes the rules, building relationships, and putting your big boy pants on, is all spot on.

    1Reply
  • Raymond McGill
    Rental Property Investor · Rochester, NH · Member since 2016 · 116 posts · 27 votes
    9y

    So, go fix your error if possible. Trust the @Ann Bellamy, et al. First upgrade your stinkin' thinkin. It wasn't a underhanded surprise, it was a newbie that go upset when they saw something they should have known was coming. Poof! You no longer a newbie in this subject. Go make the deal. 

    4Reply
  • Ryan Taylor
    Lender · Olympia, WA · Member since 2015 · 24 posts · 1 vote
    9y
    By Fed Reserve requirements they usually need a specific deposit to loan ratio. Their lending portfolio is probably just too risky for them right now to make this call, especially if they know you've got a big account that might pad their reserve ratios for future loans with you. Also, they usually earn interest on those reserves too from the fed, so it's another incentive to try and get larger deposits to balance out their ratio/make some interest money while holding your capital. Just a thought, currently in a money and banking uni class that talks all about loans/reserves.
    0Reply
  • Shanna Bechtel
    Hummelstown, PA · Member since 2017 · 29 posts · 23 votes
    9y
    I work for a bank and I can say with certainty this is illegal. Banks will often use the relationship as a factor but it cannot be used to deny the loan. That's a lawsuit waiting to happen. Equal credit opportunity act forbids this practice.
    1Reply
  • Patrick Connell
    REALTOR® · Bastrop, TX · Member since 2013 · 324 posts · 191 votes
    9y
    Shanna Bechtel can you provide a citation for this violating the Equal Credit Opportunity Act? I don't believe this situation is covered by that, because his denial has nothing to do with what this Act is trying to prevent.
    0Reply
  • Richard Allen
    Specialist · Orlando, FL · Member since 2015 · 117 posts · 89 votes
    9y

    @Tomasz Banas, I understand your frustration but would encourage you to turn lemons into lemonade.  I have found that small community banks will bend over for you and go the extra mile when it comes to service (look at how the president is hustling for your business.)   We have kept our accounts at one of the big four banks in the past and have always gone back to a smaller community bank because of the service and convenience.  IF this bank is willing to lend on something that others will not and they are hustling to bring money into their institution, is there a downside to moving your accounts for a while? Perhaps you keep your other accounts open and split your assets.   

    0Reply
  • Adrian StamerPro Member
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    9y
    Originally posted by @Shanna Bechtel:

    I work for a bank and I can say with certainty this is illegal. Banks will often use the relationship as a factor but it cannot be used to deny the loan. That's a lawsuit waiting to happen. Equal credit opportunity act forbids this practice.

     Even when it comes to a commercial portfolio loan?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Shanna Bechtel  commercial loans are not covered in ECOA  ... if your talking homeowner loans then yes of course your correct.

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  • Raymond McGill
    Rental Property Investor · Rochester, NH · Member since 2016 · 116 posts · 27 votes
    9y

    @Richard Allen  From a personal banking, I can vouch for this. 

    +++++ credit unions and small banks.  

    ------ big banks. You know the names. The ones that get caught pulling underhanded stuff like jacking your rates, calling your loans, or just putting fees on your account. 

    http://www.huffingtonpost.com/2012/04/13/hawaii-su...

    https://topclassactions.com/lawsuit-settlements/la...

    Don't deal with snakes, because you will eventually get bit. Business is about trust. 

    Also, my Credit Union has been better and faster with computer security than big banks. I know a little about computer security so, you need to find a small bank/CU. 

    Is there something about big banks that is better than small banks? I haven't done big deals, so I am only speaking of personal finance and small deals. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Raymond McGill  absolutely.. small banks are generally local community banks.

    there charter is to service the community... you live and work in the community.. you are their target

    now you do have to qualify and real estate is still tough... in most markets and only the prime borrowers are going to feel the love... beginners unless they are super high net worth or W 2 earners with substantial provable income... beginners with limited financial capacity are not going to get very far  ... FICO is not a decision maker its a decision denier if its in the toilet but it the last thing they look at ....   its Capacity  Character  credit.

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  • Raymond McGill
    Rental Property Investor · Rochester, NH · Member since 2016 · 116 posts · 27 votes
    9y

    @Jay Hinrichs

    It boils down to this. Not everyone is ready to invest in real estate. {Gasp}

    If you are debt ridden and have no money or job, then you're not ready despite all the 'no money down' investing hype. You have to get your financial life (thinking) together. Millionaire Mind. Go through Dave Ramesey. Get your act together *then* invest. FICO? Play the credit game after you get your act together. In the meantime build your RE skills and knowlege.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Raymond McGill  agreed.. one of the biggest disservice to those starting out is the thought process that anyone can do this.. and you need little to no money... can you get lucky of course will 95% spend their last dime or go  into debt on guru type stuff you bet.... then for the next decade be stuck worse than they are today.

    I got into RE at 18 selling it.... I did not buy my first investment property ( buy hold) until late 20's bought my primaries of course and I bought and flipped tons of land and other real estate.. but it was inventory that was never meant to hold... all the while building up my experience bucket and war chest...

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    2 things I have not seen mentioned here.

    1. When my clients buy a 4,5,10 million retail center I use capital markets guys for the loans. YES there is generally a 1% fee paid at closing based on the loan amount. If LTV is low enough then some lenders let the buyer roll in the loan fee and amortize it over the loan period.

    The capital markets guys have sometime 50 or 100 million in annual loan volume with these regional,local banks, and credit unions.

    When they are quoted a rate they are getting from the vice president or president of the bank not some small minion that does initial information intakes and promises the moon with rate and term with no founding in reality.

    The capital markets guys often can negotiate a 10 to 15 basis point discount because of their relationship. The lenders know if they burn the capital markets people on a loan  they can loose a ton of business whereas someone calling on a one off loan provides little value to the lender. The lender knows the capital markets people pre-scrub the borrower and property before coming to them which is why the VP and or President of the bank will take the call. Think of a failed loan where you lose the deal,lose your earnest money, or get re-traded on the rate for no reason. That 1% paid to the mortgage broker is chump change compared to the losses you could incur from the financing actually not happening.

    2. It was mentioned a technique was to get the loan approved and put money in the account and then suck it out right after closing. To combat this I have seen lenders put a  

    ( call provision in the loan docs). One of my investor friends got a loan for 25 basis points less than market on a large loan a few years ago. The bank put in a provision that if the balance for the account did not average XX and fell below XX then the mortgage rate would be adjusted upward.

    The moral of the story is do not screw around with lenders thinking you are building a better mouse trap. They have been at this stuff for decades and longer. Find a lender that is interested in your product you want to buy. Some new banks love to lend on stuff others won't touch because the 10 to 15 years old banks are dealing with legacy loans in specific asset classes they are cleaning up. I have some banks that love commercial and other that stick with residential. It's all over the place the investment strategy just like investors buying property. When the bank president and board members are commercial investors it goes a long way versus a bank that dabbles in commercial but mainly does residential. Those might do a loan but will price in extra risk because they are not an expert evaluating those type of properties. A bank in growth mode for a specific asset class usually has some very good programs.

    I used to talk to hundreds of banks years ago to learn nuances. Then I learned to just use the capital markets guys i could trust and focus on my clients as a commercial broker and my investments.        

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  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    I had to buy two condos in unwarranted complexes, local bank did the same with me, but it doesn't change much of what I do. I just have an empty bank account with them. They've been good to me and I forsee myself working with them in the future too.

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