Bank's unethical techniques

Tomasz Banas · 2017-03-11T18:37:33-08:00

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!

@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.

Sounds like your principals are getting in the way of making money. Give them what they want.

I have been required to move the business operating account to a bank when obtaining a commercial loan. So I open a checking account at that bank, and pay my bills out of it. It doesn't mean I don't keep cash from that business at another bank. I have relationships with multiple banks, in fact 5 of them right now. Written in the loan docs for most loans are clauses that allow the bank to take the funds in your checking/savings accounts, sometimes for reasons totally outside your control, such as banking regulations and requirements. So I don't keep significant cash in the same bank where I have mortgages. I recently refinanced two commercial loans with a bank new to me. I opened new checking accounts there for both businesses, and left the bulk of the cash at another bank. No big deal. Build the relationship, it is far more important than the irritation at their inflexibility. You have needs for loans, the banker has needs from his board, stockholders, regulatory agencies, etc. Why not meet his needs while getting what you need?

Hi @Tomasz Banas, That sucks. And they have it classified as commercial, it appears, so I'm far from certain that Dodd-Frank, CFPB, and the like, would protect you the same as if it were residential. Big banks tend to be ubiquitous at being horrible at speed and reliability. Some of the regional banks and small credit unions can in fact deliver on speed, reliability, and rate, but of the ones I've looked at, they ALL list cross-selling as a basic job requirement to be a MLO. Which is why I'm not at one - some people just need a mortgage, they don't need a new business checking account, 3 credit cards, and a car loan! In the case you describe, this is incredibly heavy handed cross-selling, and I'd be pretty furious if in your shoes. Also in your shoes, honestly it would be a coin toss if I did the "wrong thing" which is to get the deal and send my business account over, or if I'd do the "wrong thing" and tell them to pound sand, but lose the deal. Note that many commercial mortgages, they can impose requirements on you that you aren't necessarily cognizant of, like the right to annually audit the business and call the note due or force a refinance at lower LTV if they don't like what they see. Internally, this means they can document the business account requirement as in place to "facilitate that annual audit" of the business, and not as a high pressure cross-selling technique, in order to have their ducks in a row in case THEIR books are audited, and there potentially might not be a thing you could do about it. So if you're thinking of moving funds over and opening the account to check the box, and then pulling them after, look into what ONGOING obligations you have other than to make timely payments.

Bob is most likely right which is why I recommend meeting their needs and staying with them. You're shooting yourself in the foot by not nurturing the relationship. It will pay dividends down the road. Business is best done without emotion. You want something, they want something, sounds like the perfect relationship to me.

Perhaps of no help for your current situation, but I use a line of credit and purchase with speed and without bankers involvement. After I control the property, I fix and rent it and go in leisurely for a bank loan. Good luck.

@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.

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.

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

9y

@Tomasz Banas so you had a chance to build a relationship with the president of a bank and you told him to go to hell essentially? You don't understand how business is done. This guy has approving power on loans. You could have just happily said yes and transferred the money out 6 months later if you were not happy. Did it ever occur to you that this bank may be excellent and your banker president buddy may be very helpful to you? Also, you insisted on keeping your money at your favorite bank - the same one that refused to give you the loan? Is that the kind of loyalty you reward?

An investor friend of mine worked with a bank president at a small bank who has given him WAY more loans than they should have or that he would have gotten at a larger bank. The president left the bank and now guess what, no more loans.

Life is about who you know and not what you know.

1 Reply

Tomasz Banas

OP

Real Estate Investor/Agent · Brick, NJ · Member since 2014 · 49 posts · 9 votes

9y

Thank you all of you for great responses. I'm sorry for my delay, but it was a busy time and did not know how this situation is going to end. Now, I do.

The evening after my message to BP, I received an email from the president of the bank, advising me to have a call with him on Sunday morning. I was surprised that a president of all the branches wanted to speak with me on Sunday morning. I wondered: Was he afraid that something unethical was done or does he really care?

During the conversation, he mentioned multiple times how great they are and how fast they are growing. That's ok; I let him have it. He told me that some of his people are newbies and I should not really take everything they say very strict. I disagreed, as his team member was my only point of contact. If it is a newbie, shouldn't a mentor control everything and just train his protege?

He apologized for his team member, and after a long conversation we agreed to approve the loan, but, told me not to ask him for another loan if I don't move a business bank account by the time I'm ready for the second deal. It did sound fair to me, as that extra time before 1st and the 2nd deal would allow us to build a relationship, get to know each other, etc. He mentioned that people tell him that his bank is like a bank for the seventies; all about a relationship, not just emails, and PDFs :) I loved that idea. He also mentioned that once we have a relationship, the time I contact them regarding the next deal, for them, it's just a different block and lot number. I also loved this idea.

So, our call was on Sunday morning. Right after our call, the president sent an email to his team, asking them to send him all the paperwork for his approval. On Monday I received a mortgage commitment. I was a happy camper; I think 7 days from the application to the mortgage commitment was very fast. Well done!

MORTGAGE COMMITMENT

Now was the time to open 9-page PDF commitment and see what it says :)

I got surprised right by looking at the header of the first page. It was a commercial mortgage. But, that's ok, I didn't know what it means, as I've never done it before. Some of the things I'm going to mention I'm not sure about whether these are standard practices in commercial loans or if they were trying to push it a little.

- 20y fixed

- 5.5%

- commitment fee - $1,000 - "due upon acceptance of the commitment letter" + $250 docs fee. Based on my experience it is a little higher than usual but I thought, it's a local bank, and commercial loan, it makes sense.

- prepayment notice - not less than 30 days (that's fine)

- prepayment penalty - "The prepayment shall be accompanied by all accrued and unpaid interest and all late charges, fees, and costs due from Borrower to the Bank plus the Bank shall be entitled to charge and collect a prepayment premium of 5% in year 1, 4% in year 2, 3% in year 3, 2% in year 4, and 1% in year 5. This surprised me, but I assumed it's a regular practice in commercial loans. Is it?

- appraisal - $500 and it has to appraise. It makes sense, but I always had ana appraisal done before the mortgage commitment was issued. The bank said hey always do it after. Again, commercial banking?

- Insurance - "the borrower will provide the Bank proof of commercial liability insurance......" - After going back and forth with them I was told I don't really have to do that - good.

Conditions to Closing

- "The Borrower and Guarantors shall furnish annually, within one hundred twenty days after the close of each fiscal year, income and expense statements, a balance sheet, signed income tax returns with all schedules, and K-1s, personal financial statements, and any other information requested by the Bank. The Bank shall request interim statements, annual rent roll, and copies of new, amended, and extended leases, at any time from the Borrowers, Guarantors and all related entities now and in the future, at which time there shall be 30 days to comply. Said statements and balance sheet shall be satisfactory to the Bank in the form certified as true and correct by the Borrower and compiled by a CPA satisfactory to the Bank."

It surprised me, and I have to do all this every single year? ...and they have to review it? More on this below.

- Engagement of Legal Counsel - "We are required to provide y ou with a good faith estimate of the charge which you will be expected to pay to Bank's counsel for the services rendered on behalf of the Bank in connection with this loan. Such good faith estimate shall be $2,000.00 together with reimbursement for such reasonable expenses as shall be incurred by counsel in consummating this transaction".

$2k for legal fees? shiut.

Further communication.

Once I reviewed it with my attorney, I contacted the Bank with the clarification questions regarding the above things. The two main things were: 1. The requirement to provide all documentation on an annual basis. 2. Legal fees

My questions were strict about the purpose of the annual paperwork and additional legal fees. The answer I received from the president was that he is in business for over 40 years and this is just a boilerplate they use for mortgage commitments so I shouldn't really pay attention to everything it says, as it's just a boilerplate :) WHAT? I replied that for me it makes no difference if this is a custom form or a boilerpate. I am the one signing it and have to make sure I understand every single sentence, before I'm commiting to it. So, nicely I asked the questions again.

1. Annual docs

I asked about that the purpose of this but did not receive a clear answer. After rephrasing a question three times, still received no answer. I have no problems emailing the bank my annual docs, however, I needed to understand if their "review" of these docs may affect my loan. I am self-empoyed and my revuenue does fluctuate. My attorney took over and asked:

I am the attorney representing the buyer. We seem to be going back and forth with no 100% clarification.

For example, lets say that in 2 years, my client's business takes a financial turn for the worse but my client is able to continue to make the monthly mortgage payment on his loan with your bank, the bank is able to call the loan and require full payment of the loan before 20 year period is over? Please confirm as this is not common in the lending business? I would assume that if my client is not in default of the loan with your lender that your bank is not able to require the loan to be paid off before the 20 year period is complete.

The answer we received from the president was "I have been doing this for over 40 years. Nothing will ever be 100%. Let’s move on or let the commitment expire."

My attorney didn't accept this answer and asked again:

"I don't understand your response. Let me try to be a little more clear. Based on the mortgage commitment, can the bank request the full payoff of the loan prior to 20 years as the loan is based on 20 years."

The president asked my attorney for a phone call, so my attorney tried to reach them unsuccessfully. My attorney's response:

"I tried calling, but apparently you are not at your desk. I do not think it's necessary to speak over the phone as I would prefer to get a clarification in writing from your office about the loan, so there are no issues after closing."

Suddenly, the VP of the bank joined the conversation and responded to my attorney:

"My apologies as the phone number listed below was not correct number, and I just noticed.

As to clarification on whether the loan can be called, you will not get any statement in writing as to what we will or will not do. No matter what clause or stipulations we put in regarding receipt of financial statements and our ability to call the loan, the reality is that the bank can call the loan for any reason it so chooses. We will not mortgage our ability to make sound decisions in the best interest of the bank today on unknown future information it may receive in the future. You only know what you have today, and that goes for both sides. Your client and the bank.

If you wish to discuss further, my direct line is listed below. I will not put anything further in writing regarding this matter."

20min later the president also responded:

"There are no guarantees. You have my emails. We are not negotiating the commitment, and we will not change the closing contracts."

Regarding #2 (i.e. legal fees) they told us that usually, attorney fees are $2,000-$5,000, but this time they can do it for about $2,000 but don't know exactly about additional fees that will be added by their legal counsel" :)

Wow, what a conversation.

So, I love an idea of banking with a local bank, having a relationship, but everything I explained above sounded to me very unprofessional. I would not sleep well if I signed a commitment like this, whether it's a boilerplate or not. At first, I thought that I'm inexperienced in commercial loans, so I reach out to 3 individuals that deal with lots of commercial lending, run it by them, and they all confirmed it was very weird and sounded very unethical. It's kind of funny when I asked about legal fees of $2-5k, they asked me if I'm buying the whole complex :)

I thanked the bank for an opportunity and informed that after a full review of conditions in the commitment letter and not being able to receive clear answers to our questions I decided to pass on it and buy the property for cash.

AM I GOING TO BUY IT?

Yes, I decided to use an HELOC to purchase this property. I did not want to do it at first as it's a variable rate and did not want to be stuck with a variable rate loan on this non-warrantable condo, especially because I'm not sure if the complex will become warrantable in the next 6-12 months or not. However, after calling the bank (different bank, the one where I have my HELOC) and getting some information, I found out that even if you have a variable rate HELOC, a part of the balance can be transferred to fixed, and it's just a matter of filling one form at their location. Again, learned something new. So, hypothetically, if I had $100k HELOC, and spent 80k on the purchase, I can contact a bank and asked them to do 80k on fixed (5y-30y) and keep $20k variable rate with the visa card/checkbook so I could use the $20k as cash. Very nice!

PURCHASING ? BREAKING THE CONTACT?

If all the challenges mentioned above were not enough, here is another one. According to the contract, I was obligated to provide a mortgage commitment by 3/15. I received it on 3/13, but it took like two days to go back and forth with the bank, so on 3/15, my attorney notified seller's attorney that we are just clarifying some things and will provide the mortgage commitment by Friday (3/17). The seller's attorney replied "no problem".

On 3/16, first thing in the morning we received a formal letter from the seller's attorney stating that "they are terminating a contract because we did not provide a mortgage commitment".

Keep in mind that they have multiple cash offers that are $10k+ higher.

My attorney's responded that the termination letter is not only rejected but also unacceptable. He mentioned about the emails exchange from last night, where their office accepted it.

Also, he added that the case law requires reasonable notice to be given to cure the default before a party can cancel the transaction unilaterally. No notice was given by their office, and in fact, their office accepted our notice yesterday of the delay in issuing the mortgage.

Finally, we added that it's not an issue any longer, as I'm buying it cash and the proof of funds is attached.

Seller's attorney replied that he doesn't know a case law that requires reasonable notice to cure the default, a case law that would require notice after the time limit for obtaining a mortgage commitment. He ended his letter stating "Based upon the above, my position remains the same" and notified that my deposit monies will be returned to me.

At this point, I thought I really may lose this deal. My attorney really knows what he is doing. He invests himself and specializes in real estate law. He replied:

I do not have to cite case law at the moment to disprove your attempt to cancel the transaction. Please confirm the seller is willing to continue this transaction. If not, my client will be forced to immediately file a motion with the court by placing a lis pendens against the property requesting specific performance of the sale.

A couple of hours later seller's attorney rescinded the cancellation of the Contract. :)

24 hours later, a listing agent congratulated me on getting this deal (yeah, right), and asked a favor to delay the closing date as the seller has no place to go yet. She needs another 2 weeks. She apologized that they were trying to do everything they can do get me out of that contract. She explained that a seller is poor and could really use extra $10k+. Come on!

What a story, right? :)

It's kind of funny when I'm thinking about all this. It looks like I'm 99% sure I'm going to buy it, but who knows. Whether I get it or not, I learned a lot, and this is the biggest value.

Everything happens in my life, even if I'm not successful in something, I always perceive it not as a failure but a lesson, sometimes pretty expensive, but it is the experience I would not get otherwise.

Thank you for all your help. I went an extra mile and shared this experience very detailed so BPs can learn.

Best,

1 Reply

Chris Martin

Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes

9y

If I was that bank president, personally I would not deal with you either.

Good luck with your future endeavors. I think this is, indeed, a good learning experience.

2 Reply

Ann Bellamy

Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes

9y

I'm not sure why, your post was so long, but I actually read the entire thing.

A few comments

20 year fixed - fabulous terms for a beginner commercial borrower! Most commercial loans are 5 year fixed when you are first starting out
5.5% - not great, but at 20 year fixed it becomes fabulous
Commitment fee - very reasonable
prepayment penalty - normal
appraisal - $500 is CHEAP for a commercial appraisal, think 2000 and up where I am
Annual reporting - TOTALLY NORMAL
$2000 legal fee - I wish that's all I paid for my last commercial closing, I've seen them go to the 10s of thousands for complex or large transactions
The banks unwillingness to write an email invalidating the loan commitment they had issued - I can't blame him. All banks can call the note due for many reasons, changes in your financial status would be one, regulatory compliance is another, bank doesn't want to be in that niche any more is another. He's not going to put in writing that he agrees not to do that. End of story.
Lis Pendens - it was cheaper for the seller to rescind the the cancellation than to fight your attorney

So my take on this whole thing? I'm sorry, I think you blew a great opportunity to form a relationship with a local lender. He bent over backwards for you, gave you almost everything you asked for, better terms than most newbies get, and you killed it over providing financials? Which is normal in commercial lending!!! I think you probably made the right decision for you, but I think that decision and possibly others like it will limit you going forward.

Good luck to you.

2 Reply

Ann Bellamy

Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes

9y

@Chris Martin, thank you for saying that. I felt the same way, and would double vote you if I could. I was trying not to be too harsh, but you nailed it.

1 Reply

Tomasz Banas

OP

Real Estate Investor/Agent · Brick, NJ · Member since 2014 · 49 posts · 9 votes

9y

@Chris Martin thank you :) I guess all I can say is that I'm happy you're not (lol). I had a chance to talk today with a local, commercial real estate broker that has over 150 agents at his office. He knew that bank and somehow knew about some other of their practices. He provided me some feedback and advised to stay away. Thanks for mentioning about SEC filings - it's good to know. Relationships matter, whether it's a fish fry or another event, it's great to network. However, the ends not always justify the means. Everyone's comfort zone is different. So, in my case, if the president of the bank can't answer my questions, my broker's questions, or even my attorney's questions and I'm warned by people around me that do it for a living it's a no go for me. Think about it, if I sent you a contract for a great deal you are interested in for you to review, you would ask me questions to make sure you understand everything in the contract. Then, I would reply to you, Chris, don't worry about it, it's just a contract I use for my deals. :-D, you are telling me that you are ok with this and would just sign it? Or If you were a president of the bank I would not deal with me? What you just said worries me even more. Because it means that there are people out there that would be ok with that and "just sign a damn thing to get a deal." What about a year, three, or 10 from now? When an issue comes would you just tell them "come on, it was just a boilerplate"? I don't think so. The court would say "here's the copy of the document you signed" and you're fried :). For me, there should be no place (or just a little) for any emotions in the real estate investing. It's all based on the numbers and getting all the ducks in the row lowers the chance of any future problems.

So, what if there was $800 annual fee for docs review? or even more. In a $500k+ deal it makes no big deal, however in single condominiums makes all the difference.

I forgot to mention that they said they don't even know if their annual review of my docs will cost me an annual review fee or not. I would be ok if it does, I just need to know what it is.

@Ann Bellamy thank you for a valuable insight. That's the insight I was expecting to get here. I also thought that 20y - 5.5% is good, as well as a commitment fee. I did not know if the prepayment is normal in commercial banking, now I do. Annual reporting - too bad they couldn't just say it's normal or what it is really used for, all I wanted is more information. Thank you for letting me it's normal. Legal fees - much higher legal fees make not a big difference in bigger deals, it does in smaller transactions.

@Dan

@Dan Vleck thanks for mentioning about HELOC. I already had it, but wasn't using much of it. As I mentioned above, I learned that it's possible to just switch a part of the HELOC from variable to fixed rate with a single signature :)

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James MasottiPro Member

Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes

9y

@Tomasz Banas - Can you send me a PM with the name of the bank in question? I've been shopping around the local community banks and credit unions in NJ for commercial loans and it would be good information to have.

Thanks!

Podcast Guest on Show #312

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Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

9y

Just came across this thread. Very informative about the commercial lending world. It's really true: "He who has the gold makes the rules!" (Tyler Perry).

I too would tend to balk at a "commitment fee", (high) prepayment penalties and annual "legal" fees, all of which seem to be absent completely from conventional loans (or, at least melded into the interest rate)? Or, have I been away from normal mortgage Lenders for too long?

I'm beginning to see why Banks want to turn away business for such small sums as say less than $50k, because their FAT flat fees do indeed make it true that "much higher legal fees make not a big difference in bigger deals, it does in smaller transactions"!

Another Business that I'm aware of such open gouging of our wallets is: Guru upselling!

I'm beginning to want to put Commercial Lenders in that same category!

Here endeth today's rant...

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Bank's unethical techniques - what to do?

Bank's unethical techniques - what to do?

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