Mortgage Application Rejections and Second Chances

Wall Street Journal article regarding the options available to many borrowers facing initial rejection for their mortgage applications, posted here by Crowley and Cummings Massachusetts Real Estate Attorneys.

The full article is posted below.


'Second Look': First Aid for Borrowers
By RUTH SIMON

When a borrower hears a "no" from the bank, sometimes it really means "maybe."

Many of the biggest U.S. banks, criticized since the financial crisis erupted for making fewer loans and toughening borrowing standards, have launched what industry officials call "second look" programs to review rejected loan applications.

Some bank employees hunt for credit-report errors that hurt borrowers the first time their applications were vetted, or unreported sources of income that would make a consumer loan look less risky. Even more common are reviews of rejected small-business loans by loan officers and other bank employees.

The moves are a throwback to traditional roll-up-the-sleeves loan underwriting, emphasizing a potential borrower's track record and relationship with a bank over credit scores and other data that powered the industry's loan machine when credit was fast and cheap.

"I don't think of it as being looser. I think of it as making good judgments," says Stephen D. Steinour, chairman, president and chief executive of Huntington Bancshares Inc. At the Columbus, Ohio, bank, a second-look program and separate effort to make more loans to companies that regained profitability after hitting a rocky patch have boosted the approval rate for small-business loans by 4.7 percentage points in the first half of 2010, when compared with the rate for all of 2009.

The Financial Services Roundtable, a trade group of 100 large financial companies, says nearly all its members have second-look programs. Such banks include Bank of America Corp., J.P. Morgan Chase & Co., PNC Financial Services Group Inc. and U.S. Bancorp.

At some banks, the reviews are triggered automatically for spurned loan applications that fell just outside the lender's standards. Lenders also may allow borrowers to request a review.

While the collective push isn't nearly enough to end the loan logjam, bankers say it is starting to have an impact. For example, last month's Federal Reserve survey of senior loan officers showed the first overall easing of lending standards for small businesses since 2006. "Part of this is due to the second-look programs," says Bob Seiwert, a senior vice president of the American Bankers Association, a trade group of U.S. banks.

Frederick Cannon, co-director of research at Keefe, Bruyette & Woods Inc., says that the effectiveness "of any one of these campaigns individually is modest, but at the margin, these things can make a difference.

William Dunkelberg, chief economist of the National Federation of Independent Business, a trade group for small businesses, says the moves "can't hurt," but believes second-look programs are aimed more at rehabilitating banks' public-relations image than at making new loans.

Some banks acknowledge that their second-look programs are at least partly in response to outside pressure.

"I give him full credit," says James Dimon, chairman and chief executive of J.P. Morgan Chase & Co., referring to Lawrence Summers. The top economic adviser to President Obama suggested to Mr. Dimon at a meeting last December that the nation's largest bank in stock-market value review small-business loans it had denied.

Since then, the New York bank has offered $198 million in loans to borrowers who got a second round of scrutiny. J.P. Morgan won't comment on the loans' performance.

U.S. Bancorp says it sees the "same relative performance from second looks and appeals as we do from first-pass approvals," according to a spokeswoman for the Minneapolis bank.

The deeper analysis can cost hundreds of dollars or more, compared with $30 to $50 for a loan analysis based on credit scores.

"There's no right way or wrong way, but these two ways of underwriting a business loan can result in a different answer," says Mr. Seiwert of the ABA.

Huntington, with 608 branches in six states and about $52 billion in assets, made about 475 loans in the first half of 2010 to small businesses and consumers using its second-look program. Fourteen consumer-loan specialists work with loan officers to uncover new information about consumers that could make a difference in whether they should be approved for a loan. Huntington's 300 small-business bankers are encouraged to look for ways to help rejected loans meet the bank's standards.

"The financial statement doesn't tell the whole story," says Mr. Steinour, who became Huntington's CEO in January 2009.

In mid-July, Curtis and Renee Fields got a $25,000 unsecured personal loan to get their Cincinnati lunch spot, called the Squirrel, ready for its grand opening in August. Huntington initially rejected their application because bank officials worried they would be carrying too much debt. The Fields had applied for two Small Business Administration loans totaling $50,000 but needed cash quickly to pay contractors.

Their banker at Huntington realized the couple's debt level was temporarily too high because they had been using their own money to finance the restaurant. Based on their relationship with the bank and good overall credit record, Huntington decided to approve the loan. It was repaid the following month.

"We're hanging in just fine," Mr. Fields says. The Squirrel, known for its double-decker sandwiches, opened on time and now has 12 employees.

Lynne Logel, a 66-year-old elementary-school teacher living in Marysville, Ohio, was turned down for a mortgage refinancing by Huntington because her credit score was too low. After a consumer-loan specialist at the bank suggested she check her credit record, Ms. Logel found two errors.

After the flubs were fixed, Ms.Logel's credit score jumped to 709 from 656. In July, she got a $140,000 home loan from Huntington that she plans to pay off by the time she retires in six years.

"I feel like I can retire," she says. "I had been praying about this."

—Robin Sidel contributed to this article.
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Crowley & Cummings are real estate attorneys located in Dedham MA specializing in real estate closings, title examinations, complex title issues, purchase & sale agreements, condo conversions, and other related services. They service lenders and mortgage brokers, real estate agents, as well as buyers and sellers in Massachusetts, New England, and throughout the US. To learn more visit them online at www.CrowleyCummings.com.