In this down economy, the pressure has been turned up on community banks to make sure that consumer, small business, and small commercial loans are under-written correctly. With this pressure, the criteria for underwriting has not only increased, but also the bank's need to implement the underwriting guidelines has increased as well. So, in simpler terms - Its a lot harder to get a loan than it used to be. As many disgruntled bank customers are finding out that the way they used to conduct business has now changed, the common response of "I've done business with this bank for many years, and now I'm being treated unfairly" is often followed by the question of "Why?" Well, hopefully the loan officer has done a good job of explaining how the circumstances of the bank have changed, but in most cases, this is not being communicated to the customer. Many times, the customer is just cut off altogether with little or no explanation of how to remedy the situation. Well, there are a few reasons that may explain the situation.
1. The community bank you bank at may be in trouble.
It is amazing how quickly the tide turned for many small community banks that were profitable one month, and then in trouble the next.
With the economic boom early in the decade, there were many de novos or start-up banks that flooded the market wanting a piece of the "pie". This forced all banks- young and old - to compete for the consumer's business. In the midst of this competition, many "safe" rules of lending were lost. This happened due to the tremendous number of new, "unseasoned" lenders entering the market, the lack of oversight from the bank regulators, as well as the sheer pressure of the market for the banks to make loans or they would go down the street to their competitor. In this environment, many small community banks had visions of growth in hopes that they could sell and make a tremendous profit for their stockholders. Much of this growth was tied to real estate development. When the market became saturated, things began to unravel - and many of the small community banks that were so focussed on selling and booking loans, had no idea what kind of problems they had when the loans were not able to be paid back. The friendly bank regulators that were so friendly on the last visit, returned with a whole different set of rules and guidelines - many of which were not accommodating to the customer. So, if you are having a harder time at your bank than you used to, it could be because your friendly community bank is in trouble and now has to abide by a very strict set of guidelines and can no longer accommodate even the best of customers the way they used to.
2. The rules have changed for everybody.
The banks that put loans on the books without any disciplined underwriting, are either in trouble or out of business at this point. What about the good banks? These are the ones that probably had some restraint, some wisdom, some leaders with "gray" hair that have seen this kind of "bubble" before and positioned their banks to avoid the "bust". These banks are also making it a little harder to get a loan. Why? It is mainly because of point number 1. The bad banks have made it tougher on everyone. With the hundreds of bank closures, and the constant negative stream of media hitting the airwaves daily, there is heightened fear of making another "bad" loan. This, in turn, makes the remaining "good" banks very careful and purposeful in the loans that they make. It has caused them to have to "educate" their existing borrowers on how to properly underwrite a good loan and therefore makes it more difficult to get a loan even when nothing has changed in their environment and they have done nothing wrong.
3. We are in uncharted territory.
Even though the word is that we are "officially" out of the recession, it is hard to tell that from all the continuous lay-offs and foreclosures. Our country is in turmoil, and is facing an unbelievable national debt. We are grappling with a health-care bill that may negatively affect many small businesses that are already teetering. Banks are staring down the barrel of legislation that could force even more regulation with new rules that require more overhead and paperwork that could choke an elephant. With all the uncertainty, banks are trudging forward in uncharted waters and operating very conservatively. This cautious attitude may be inconvenient for the customer but is for the better of the whole customer base in order to stay in business.