Lenders are in the business of loaning money and obtaining a return on their investment balanced against their risk. All lenders have different lending models for credit approval and underwriting to minimize the risk. However, there are other factors that may enter the equation and can result in a good loan turning bad. These can be divided into three broad groups:
External Causes: These factors are outside the company’s management and/or the lender’s control. Examples include negative economic events, such as high interest rates, recession, technological advances making the company’s products obsolete and “acts of God” such as floods, hurricanes and fire.
Internal Causes: Factors brought on by the company’s management can include management deficiencies, such as lack of managerial, operational and/or financial controls; product deterioration; loss of market share; not keeping up with the competition and fraud.
Lender Causes: Problems caused by the lender. These generally include improper loan structuring, an inadequate or excessive loan amount, failure to adequately monitor a loan, improper statement analysis, insufficient collateral, poor documentation, an inexperienced lender and fraud.
Once a lender discovers a loss is on the horizon, many companies assign the management of the problem loan to a special loans or workout department. In some companies, the recovery of problem
loans will remain the responsibility of the group that underwrote and monitored the loan, reflecting a “cradle to grave” philosophy for the handling of loans.
Professional advisors must understand the lender’s structure for problem loan recovery, especially in the “cradle to grave” situations. Will the people who originated the loan be the best people from whom to collect if the loan becomes a problem? Perhaps, but they may have developed an emotional attachment to the credit. They put their faith in the company’s management
and business plan, structured the loan and monitored performance. Therefore, the loan should not have been a problem.
But it is! And yes, it’s a complete surprise. However, a lender’s team may also be experiencing stages of grief as the recovery process unfolds, particularly in the case of fraud.
The stages of grief do not necessarily occur in any specific order. Lenders often move between stages before achieving a more peaceful acceptance of the loan loss.
Denying the reality of the situation is often the first reaction after learning about the loss. People often think, “This isn’t happening! This can’t be happening!” This is a very normal reaction to rationalize overwhelming emotions.
Lenders may initially look for evidence supporting this position, which could lead to a few wild goose chases. Professional advisors must present the facts of the situation to the lender and resist spending unnecessary time and money on these diversions.
For lenders experiencing grief, this stage is a temporary response that always carries them through the first wave of pain.
As the masking effects of denial begin to wear off, the reality of the loss and the subsequent pain reemerge in the form of anger. The anger may be aimed in many directions, including the company management and ownership, the lender’s monitoring staff and the professional advisors. The thought process shifts toward the questions: Who is responsible? Who should be fired? Who can we sue?
Professional advisors must provide the lender with a fact-based assessment of the situation and rational courses of action. There may be a tendency for the lender to “shoot the messenger” or refuse to accept the facts.
Rationally, the lender knows the professional advisors presenting the situation should not be blamed. But emotionally, they may resent the advisors for presenting and/or confirming the facts and causing pain.
To succeed, the professional advisors must be completely patient while delivering the message, while preventing the lender from drawing any conclusions not supported by facts. Advisors must reiterate the findings and the options available as many times as necessary. They also must discourage legal actions that have little chance of producing results, such as suing guarantors who have no assets.
The normal reaction to feelings of helplessness and vulnerability when facing a loss is having a belief there must be a better way out. Can’t the company’s operations be corrected quickly to generate cash to pay the loan down? There must be a better offer out there for the business or its assets? Could we (the lender) assume an equity position and run the company long term for a better payoff? Should we put more funds at risk to achieve this better way out?
This is a very challenging time for professional advisors. Quite often, the best options available are time sensitive. During this particular stage, it might be difficult to persuade the lender to focus on making a decision based upon the real options available and to avoid seeking greener grass (that, of course, does not exist) in other places.
Guilt often accompanies bargaining! The lender will try to rehash the events that led to the loss position and revisit the alternative actions that could have prevented it.
The depression that follows loss is a reaction to practical implications relating to the loss. How does this loss affect my career? Will I be fired or reprimanded? Sadness and regret predominate this type of depression. Communication with the lenders is less frequent, mainly because they are less available to discuss the events.
Professional advisors must be persistent in maintaining communication with the lender and press for any or all decisions that must be made.
Reaching this most important stage of grieving cannot come too soon for professional advisors. The lender is now able to accept the facts of the situation and make decisions on the next course of action. This phase may be marked by withdrawal and calm, but the lender is now ready to do what has to be done. Although this is not a period of happiness for the lender, he is moving toward closure.
Losses are inevitable in the lending business, but experiencing a loss is never a pleasant experience for any lending institution. An understanding and awareness of the stages of grief will always help professional advisors fulfill their mandate.