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freakonomics - one story of an unwilling bank

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beethoven

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http://www.freakonomics.com/2011/12/28/one-mans-story-of-a-very-unwilling-bank/

One Man’s Story of a Very Unwilling Bank

STEPHEN J. DUBNER
12/28/2011 | 11:52 am

A reader we’ll call H., who’s in the rental-property business, writes in with a bizarre story about his bank. Assuming it is at least 60% true from both sides (his side and the bank’s), what are we to make of this?
My partner and I were looking to obtain a small business loan. Our banker told us that loans are very hard to obtain because banks are being very stringent. Not like we were going to shut down without a loan, but we figured it could help us grow the business. So, in an effort to build credit (and a good relationship) for our business with a major U.S. bank, my partner and I proposed to our banker that we would give him $50,000 cash to hold onto and in return, have the bank loan us $50k for 5 years. Basically we were securing the loan with cash as collateral. This way, we could prove to the bank that we are a responsible business and were hoping that after this first loan, the bank will be willing to lend to us in the future with more favorable terms. Basically, if we ever defaulted on our loan, the bank would have our $50,000 in their vaults to take from.
I was shocked to hear his response. He basically said that the underwriter could only approve this type of loan for $25,000. Email below:
“Hey H.,
As I discussed on the phone here are the terms of the loan:
5.95 interest rate
$75 origination fee
60 months payment plan (no prepayment penalty)
High risk industry (real estate investment) next loan should be more favorable terms
$25,000 approval amount.
I am sorry this is not what we wanted but unfortunately I am at the mercy of our underwriters on this one.”
So I responded with:
“Does your underwriter know/realize that we are giving him (in this case) $25,000 as collateral? Meaning, this is the most guaranteed loan (the safest bet) that BANK_NAME will ever make in its history. BANK_NAME is essentially taking zero risk. He/she should be more than happy to approve a loan similar to this in the sum of trillions. BANK_NAME is guaranteed to see the return. … the money will be sitting in your vault.
Am I missing something here? Why would he not approve this for 50K? I’m just trying to understand the rationale behind this decision. (and I understand that you are just forwarding info from the loan department).”

(comments follow)
 

Steve

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years ago,.. (1997) I had just retired from the service, and cashed out on a lifetimes worth of investments,.. I was in the process of rebuilding/remodleing our home.. and felt I needed to get better credit..

I had a great secure job, over $60,000 in the bank and and estimate for about $90,000 on the complete remodel if the contractor did the entire job..and our house was paid off,

as an electrician and being fairly capable of doing all but the major structural work by myself, I felt I was in a good position to start.. but just in case and as a way building up my credit. I went and approached the bank for a loan of $35,000
the property was assessed at $95,000 I had $60,000 in the bank.. they weren't "comfortable" with the loan for $35,000 so they turned down my application..

and now in addition to no credit, I had a negative "decline of loan application" on my credit report.. they seemed a little shocked when I withdrew my funds from the bank that afternoon..

another loan officer at another local bank was happy to draw up a line of credit with little to no conditions..

so yes I would believe that a bank would be stupid enough not to loan a person money... even with excessive collateral

yet they seem happy to loan money in risky loans with little to no real collateral...
 

beethoven

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indeed. similar experience here. threat of removal of all funds meant decision was reversed, however.
 

Steve

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beethoven said:
indeed. similar experience here. threat of removal of all funds meant decision was reversed, however.

to stay with them would only benefit them in the future, by going to a different bank we were both were able to get what we wanted..

I had no intention of dealing with them after their decision.. why on earth would I want them to make money on any further transaction with me after they turned my request down?
 

beethoven

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yes understand your decision.

here, a troubled soul was exposed is how it might be described. we remained and they didn't last at this branch long, if one can put it that way, and that was a good end result.
 

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