All Forum Posts 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

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

Thanks,

Scott

@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

@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

@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

@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

@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.

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

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

Congratulations on your first purchase without a lender, @Jeff Short.

I also own investment property in the Yakima area, as well as other locations.  Happy to connect if ever desired.

Best Regards,

Scott Price