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Home >> Lending >> Business Credit
Very Large Loan: Very Bad Market: Very Big Problem
I am trying to get assistance with a problem I am experiencing with a local bank. A little more than three years ago, I borrowed money for the purpose of acquiring and developing residentially zoned property, a practice and activity that I have engaged in for over 20 years.
When the loan agreement was executed, the proposed development was evaluated and appraised on the basis of a completed project, a total of $2,200,000. The loan was for that amount.
The acquisition price was $1,200,000 and $1,000,000 reserved for improvements.
As we are all aware, the economic climate and market conditions have changed, whereby commencement of the development is not presently feasible. During the course of the first year of the loan, I paid approximately $395,000 for engineering, loan interest payments and fees pertaining to re-zoning for my intended use of the property. These costs elevated the loan balance to $1,595,000. My obligations as far as “servicing” this debt became increasingly difficult, and this was exacerbated as I was not able to develop the land.
When the loan was scheduled for renewal, the bank decided to increase the interest rate on the loan from 4% to 5%, their reason being that the loan was then categorized as a higher risk. Although it seemed contrary to good business sense, I had no choice but to go along with their position. In the interest of reducing my indebtedness, I sold a property (in part, collateral for the loan) and paid the bank nearly $300,000 and set aside $65,000 for the purpose of making interest payments during the course of 2009. The balance on the loan is currently $1,295,000.
Now the loan is subject to renewal again and the bank has decided to again raise the interest rate to 6%. My question to the bank was “Why are you making decisions that further encumber your client?”. Their position, in my view, further threatens my financial stability and potentially could have a profound negative effect on them. I have no choice as I cannot secure a loan of this type from another bank to pay off the loan.
Does banking law or regulation allow them to conduct themselves in a manner that could potentially destroy the financial stability of a client? Perhaps I should not have proceeded with this venture since both my office building and my principal residence together with the land itself was collateral for the loan. Perhaps they shouldn’t have either.
Does there exist some provision in banking law or regulation that requires a bank to conduct itself on the basis of good will? Is it permissible or even legal for a bank to create these difficulties for someone who created and maintained a “performing loan”? I would appreciate it if you would enlighten me.
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 It is actually quite normal and legal for a bank to increase the interest rate at a renewal of a loan that the bank has reason to consider riskier due to changes in the economic environment. Keeping maturity periods fairly short is one way that the bank can build in a review of its position at regular intervals, and then adjust the terms of the renewal to reflect its perception of risk, etc.
At each renewal of the loan, the bank probably also had the option of simply refusing to go forward and demanding that you refinance elsewhere. It appears that the bank continues to want your business, because it hasn't taken that option.
The bank would like nothing better than to see your fortunes turn around and your development get built, sold and paid off. It's clear, however, that things are not moving in that direction right now, and the bank's loan fund will be extended for longer than it planned. That, coupled with a reasonable belief that the bank's risk in the loan had increased, would dictate a higher interest rate at your coming renewal.
Published on BankingQuestions.com 7/30/09
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