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#257869 - 10/16/04 03:43 PM
Denying a loan based on possible jail sentence
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100 Club
Joined: Oct 2003
Posts: 170
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I think this has come up before, but I just can't find it.
We have an existing customer with a very good credit history who has applied for an extension of the term on her HELOC. The trouble is that the newspaper recently reported on her arrest for a significant crime that could likely lead to a jail sentence. Her ability to repay will be pretty unlikely while she's in jail. I think we can deny the application based on her anticipated lack of cash flow. Am I correct? If so, what would be the proper reason for denial on the adverse action notice? Thanks.
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#257872 - 10/18/04 01:48 PM
Re: Denying a loan based on possible jail sentence
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Platinum Poster
Joined: Apr 2003
Posts: 933
New York State
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Can you provide a little more information? What do you mean, an "extension on the term of the HELOC"? Has the open-end phase ended? Or the closed-end phase ended? What needs to be extended?
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#257873 - 10/18/04 04:42 PM
Re: Denying a loan based on possible jail sentence
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Joined: Oct 2003
Posts: 170
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I didn't have all my facts straight. It's not a HELOC. She's applying to refinance her closed-end home equity loan for additional cash. She currently has good credit and good cash flow, but our concern is that if she's sentenced to jail time at the upcoming trial she won't have that cashflow anymore. We don't know for sure if she'll be sentenced to jail time or not, but we do know for a fact that she was arrested for the crime because of the newspaper report. Can we deny the loan based on anticipated lack of cashflow based on what we know?
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#257874 - 10/18/04 05:19 PM
Re: Denying a loan based on possible jail sentence
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Power Poster
Joined: Aug 2004
Posts: 3,300
back to my roots
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I remember replying to a thread almost identical to this a couple of months ago. My position is this: How can you deny someone based on something you heard in the news? How unfair is that? If she is creditworthy at this time, I say she should get the loan. Besides, what if she is found innocent? Remember, innocent until found guilty...
Just my very humble opinion...
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#257875 - 10/18/04 06:14 PM
Re: Denying a loan based on possible jail sentence
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Platinum Poster
Joined: Apr 2003
Posts: 933
New York State
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Now that you have provided more facts, I tend to agree with AGJ. We can't predict any number of events that occur in people's lives, including crime (and results), death, unemployment, etc. And, you still have the home as collateral, assuming that you are not over-extended on your LTV. And yes, she could be found innocent. I'd be very careful with making an assumption of guilt.
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#257876 - 10/18/04 08:44 PM
Re: Denying a loan based on possible jail sentence
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100 Club
Joined: Mar 2004
Posts: 102
New York
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My background is in lending and I would be very uncomfortable suggesting a bank pretend they don't know about a publicly reported arrest for a felony with possible jail time in evaluating a loan application, for safety and soundness reasons. Many loan policies used to state that this sort of thing was an "undesirable" loan. As a compliance officer currently, I would and have told lenders under those circumstances not to compromise safety and soundness to make the loan out of fears of compliance violations and I think most examiners would agree.
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#257877 - 10/18/04 09:42 PM
Re: Denying a loan based on possible jail sentence
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Anonymous
Unregistered
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I agree. Possible jail time is not a prohibited basis. You should be able to consider it.
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#257878 - 10/19/04 12:49 PM
Re: Denying a loan based on possible jail sentence
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10K Club
Joined: Jul 2001
Posts: 85,445
Galveston, TX
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Jail time - Smail time - that is not the issue and that is not what you focus on.
The question that you ask the applicant is the same question that you ask all applicants. Is there anything to your knowledge that impact your future cash flow.
If the say no - they are lying on their loan application.
If they say yes - then you have a reason to deny them credit.
Works the same with future retirees, etc. It's just the standard question you ask all applicants.
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#257879 - 10/19/04 02:19 PM
Re: Denying a loan based on possible jail sentence
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Posts: 170
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To rlcarey, thank you for some sound advice. I think you're correct to take the emotional baggage out of this issue and focus on what are the known facts and how they'll impact the ability to pay the loan. In this case we know that she was arrested and we think that she might have a significant drop in cash flow (because she might be sentenced to jail).
Using your example, if an applicant states that they are going to retire in six months, then you know they will have reduced future cashflows. But if the applicant said that they might retire in the near future can you deny the loan based on the likelihood of reduced future cashflows?
Here's a second approach. We are required to make a credit decision within 30 days of a complete application which contains all the relevant info needed to make a credit decision. Would this application not be considered complete until we know whether or not the applicant is going to be sentenced to jail based on the factual information we have regarding her arrest?
Thank you.
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#257880 - 10/19/04 02:39 PM
Re: Denying a loan based on possible jail sentence
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Joined: Jul 2001
Posts: 85,445
Galveston, TX
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Quote:
Would this application not be considered complete until we know whether or not the applicant is going to be sentenced to jail based on the factual information we have regarding her arrest?
NIMHO - You need to make a decision on the facts that are known at the time of application. That would be like saying, the customer claims that the bad credit on thier credit report is not theirs and you delay a credit decision while they try and clean it up. Deny the credit application and then if things clear up - they can re-apply.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com
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#257881 - 10/19/04 03:32 PM
Re: Denying a loan based on possible jail sentence
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Joined: Oct 2000
Posts: 10,233
Toano, VA
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I agree with Randy's approach to this. You don't want to play games with this applicant. She deserves a prompt credit decision.
As you think all the way through this, however, you may decide to ignore the kneejerk reaction to the chance of diminished income/cash flow and grant the credit. If she's convicted and there's no secondary source of income, you already have a problem asset. By refinancing your existing equity loan you may provide her the funds necessary for a successful defense--preserving her capacity to repay your loan. If her defense fails, she's more likely to pay you than other creditors because you helped her when she was in a jam. In any case, you will be well-secured by the property...and what's she going to do with her home if she's in jail? If she sells, you're out. If she rents, there's cash flow.
This one may require a bit more administration than most HE loans, but I wouldn't turn tail and run unless she's totally unrealistic about what could happen.
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#257882 - 10/19/04 06:56 PM
Re: Denying a loan based on possible jail sentence
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100 Club
Joined: Oct 2003
Posts: 170
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Quote:
The question that you ask the applicant is the same question that you ask all applicants. Is there anything to your knowledge that impact your future cash flow.
If the say no - they are lying on their loan application.
If they say yes - then you have a reason to deny them credit.
I agree. But if we tell the applicant we're aware of the arrest since it was published in the newspaper and ask that question, the likely answer is "maybe" depending on how the trial goes. Can you deny based on the maybe?
Quote:
As you think all the way through this, however, you may decide to ignore the kneejerk reaction to the chance of diminished income/cash flow and grant the credit. If she's convicted and there's no secondary source of income, you already have a problem asset. By refinancing your existing equity loan you may provide her the funds necessary for a successful defense--preserving her capacity to repay your loan. If her defense fails, she's more likely to pay you than other creditors because you helped her when she was in a jam. In any case, you will be well-secured by the property...and what's she going to do with her home if she's in jail? If she sells, you're out. If she rents, there's cash flow.
Possibly, but this application is for additional cash, so we're increasing our exposure. In either one of your scenarios we still stand to lose based on the fact that this is a home equity loan putting us in a second lien position. And even if she sells it or rents the home, it might not be enough to cover the first and second lien debts. We'd much rather deny this application if we can do it legitimately. Is there a way to do this?
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#257884 - 10/19/04 08:22 PM
Re: Denying a loan based on possible jail sentence
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Anonymous
Unregistered
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Just curious - why would the declarations section of a residential mortgage app have the question " are you a party to a pending lawsuit" if we couldn't use the affirmative answer as a basis for denying credit? I'm assuming that question is there to ascertain a potential drop in personal assets/repayment ability? It would seem similiar to a pending trial situation to me.
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#257885 - 10/19/04 09:49 PM
Re: Denying a loan based on possible jail sentence
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100 Club
Joined: May 2004
Posts: 218
Minnesota
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I am relatively new to compliance but not to lending. Sometimes people forget what the job description of a loan officer, and bank employee, in general is. It is to invest the owners money to maximize profits and make a return on their investment. I agree with the future change in income approach. The laws were made to protect consumers, but not to force banks into making loans that are evident losses. Furthermore, you should examine your loan docs and look for an insecurity clause, that states if you feel, by action or inaction on the borrowers part, that your security in the collateral is jepordized or that the likelihood that you will be paid according to the terms of the loan, you may have the right to call the loan. Now, I am not telling you to start drafting your demand letter, but it is good to understand your options and maybe use them as leverage or a persuasive subject to get the customer to make a peaceful exit. Experience in foreclosures and workouts would also tell me it would not be a bad idea to keep an eye on the first mortgage holder as well. Their demand or calling the loan my force your hand.
this is my opinion, as long as it is, take it or leave it.
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