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)
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)
