When it comes to the 5 C’s of credit, character always counts. What should a lender do when a borrower exhibits questionable character? Is there wiggle room to ignore certain character flaws and not others? Below we recount a run in with a Borrower that exhibited questionable character- what we consider to be the most important of the 5 C’s of credit.
One of our client’s approached us with an underwriting package for an experience restauranteur. The loan application and supporting documentation was clear and well organized. This particular principal had borrowed from the Lender in the past. But the principal was considered a less than ideal Borrower. They had exhibited unprofessional behavior towards the previous loan officer. However, the loan was paid off within the terms of the loan documents. There were no delinquent payments, no defaults and no credit losses on this loan. Objectively, there was no reason not to proceed with the loan underwriting.
We compiled our list of initial question as we moved through the underwriting process. The questions were not atypical when assessing a start-up restaurant. In particular we had questions about the collateral that would secure the loan. We sent our list of questions to the Lender and the questions were forwarded to the Borrower. The Borrower’s emailed response to our questions was not professional. However, the Borrower answered all of our questions. We shared our concerns with the Lender but we agreed with the Lender that being polite is not always necessary. Objectively, the Borrower answered our questions and there was no reason to deviate from the typical underwriting process. One unprofessional email was not enough to materially impact the underwriting process.
We recommended approval of the loan. We included in the approval memo a simple comment that the Borrower answered our underwriting questions albeit outside the normal bounds of professional behavior.
Post- Approval Character Issues
About one week later we received a call from the Lender. They told us that the Borrower was unwilling to guarantee the loan. Furthermore, the Borrower was unwilling to pledge collateral. We rescinded our approval of the loan given the material change in the loan structure. The Lender indicated that in the course of this exchange the Borrower was aggressive and wildly unprofessional. The Lender provided an update to its Loan Committee. Our client formally declined the loan.
In this example we tried to balance the objectivity of assessing credit risk and the subjectivity of the character of a “prickly” borrower. However, once this Borrower began making unreasonable requests in an aggressive and unquestionably unprofessional manner, the character questions were too great to ignore. We felt that if that was how the Borrower would act now it was clear indication of how they would act in the future. We wondered aloud to the Lender- how compliant would this Borrower be if payments were late, if documentation was past due, etc. These character questions were to great to sweep aside.