Lending More for Debt Servicing

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Question:

We have been asked by the local Knights of Columbus to finance the rehabilitation of their building. The Knights are a break-even operation and cash flow is minimal. Can we make a $150,000 loan and provide them $100,000 for the rehab and escrow the remaining $50,000 for servicing the debt repayment without receiving criticism from regulators and having the loan listed as substandard?

Answer:

Loans with no visible source of repayment can and should be classified. How do you expect to be repaid? Not only will the loan be classified (perhaps worse than substandard), but attempting to disguise a problem credit by setting up a debt service reserve may net you criticism for weak credit administration.

First published on BankersOnline.com 1/17/05