Melinda Bailey, a career commercial banker, spent 45 minutes in studio answering questions about the appropriate uses for loan forbearance, loan deferment and loan modification in Nashville. Melinda explained the advantages and consequences of each and gave her professional advice on how to work with your bank. This Real Estate Experts Podcast was recorded on Wednesday April 8th, 2020 at 8am. You can listen to this episode on iTunes, on Spotify and everywhere you find your podcasts.
Grant: Today, Melinda Bailey joins the show. Melinda is a 30-year veteran of the banking industry and is the senior vice-president for commercial lending at a large regional bank. Melinda, thank you for joining us.
Melinda: Grant, thank you for having me this morning.
Grant: There’s something particularly important I want to talk to you about. Lately on social media, there is a meme that says “forbearance is not forgiveness” that is spreading like wildfire. Let’s talk about the difference between forbearance, deferment and modification. What is forbearance?
Melinda: Forbearance is a way to extend a loan when you are truly in a position that you cannot make your payment. It is typically for a span of six months. It’s considered a downgrade in credit when a borrower sees that there’s no way that they’re going to be in better shape within six months. So, the banker has to downgrade the credit risk that’s tied to the credit and do a little bit more documentation than you do on a 90 day deferment. It’s more of a credit rating and reporting than what’s required for a deferment or a modification.
Grant: Forbearance is not a strategic way to not pay your mortgage at the moment. This is a close to last ditch effort to save your property?
Melinda: Exactly. This is forbearance and then it goes into troubled debt restructuring. That is first before we go into a TDR or we go into the foreclosure process. So, again, even in the current conditions, it’s just a mechanism that we have to rate the credit based on the current borrower’s financial situation and guarantors. Right now, what we are dealing with is deferment. Deferment is a 90-day situation because of the pandemic. We feel like a lot of the borrowers are guarantors will hopefully be in an upward swing after this 90-day cleanse and our country will be back into a healthier situation.
Grant: A deferment is likely the correct instrument or the correct method for delaying current payments. What happens to those payments? Do they get paid in a lump sum after 90 days or does it get added to the end of the loan?
Melinda: Typically, deferred payments are added to the end of the loan. Each commercial note has a balloon mechanism. Now, this is not mortgages, these are commercial notes that have usually 5-year maturities or 10-year maturities. And those payments are added at the end. It would be added at your balloon payment. And that’s what the document will say when we send out the deferment modification document for you to sign.
Grant: A lot of people think that deferment is the same thing as modification, where payments are just added to the end of the loan. What is the difference between deferment and modification?
Melinda: A modification is extending the maturity date and we are not doing that. Modification means if you were to mature on April 4th, 2020, then we change the maturity to be July 4th, 2020. We’re not doing that. We’re simply going to add the principal balance and the interest that we’re deferring for those three months into that lump sum due at the original maturity date.
Grant: Let’s talk about the paperwork that’s required for a deferment versus a modification. How do you go about qualifying for or papering a deferment versus a modification?
Melinda: A deferment is based on the current COVID-19 virus. It is where you call me and say, hey, due to this virus and losing tenants or the business because of it, you are impacted and not able to make your payments. You will send me an email and we will then go in and do either an interest only deferment or a principal and interest deferment for 90 days. A modification must go through the underwriter and it’s typically based on – – for example, you’re doing a new construction project and workers are deemed nonessential and you can’t continue to work on that project. That is going to, of course, extend out that project time. At that point, we would do a different type of loan. We would not do a deferment, per say, but we would go in and modify the maturity date because you can’t get framers there to frame the project. It is going to push building out three more months. I had a client who recently got hit by the tornado. They were building a six-story building in Germantown and the tornado destroyed the fifth floor. And so, after the adjuster and engineers went out there, they said, yes, you’re going to have to rebuild the entire fifth floor. They wrote a letter saying that they needed six additional months extending their loan because it would take about three to six months to rebuild the fifth floor and delay the original construction timeline. That makes sense. So, at that point we went in and modified the note and extended out the maturity date for six more months.
Grant: That makes sense. And that takes quite a bit of time to go through that underwriting process to do the modification. How long does it take from the time that you request a deferment to the time that you are granted a deferment?
Melinda: For us, it’s instantaneously right now. You send me an email; I have to add a memo. I send it to my assistant who puts it into our lending platform system, it’s automatically flipped over and goes to approval, which is automatically done. We are doing those quickly and then it’s into document prep and it’s a one-page e-sign document within three to five business days after I get your initial email. I am trying to work on those as quickly as possible.
Grant: On deferment, you said that it can be either an interest deferment or a principal and interest deferment. How do you determine that?
Melinda: Great question. I really try to be proactive in speaking with my clients and see what is really deemed necessary at this time. We realize, as a bank, that this is going to be a year long problem. We realize that it could take months before you start to see cash flow and that you probably have to step back because if you’re a restauranteur, you’re going to have some cash outlay incurred before you can even see people coming back in to have dinner. And so, we look at that on a case-by-case basis and see if you could do interest-only for a few months. If this doesn’t get better, then come back. Let’s talk again and we’ll go into the P&I deferment. We rely on that interest income to survive ourselves. It’s a balancing act. I know a lot of folks have the misconception that “run and get it now” or the banks are not going to give it to you. And that’s just not the case. The bank is here as a partner for you, but we must also make sure because borrowers and guarantors are our tenants. We have to make sure that we position ourselves to be here for you throughout the rest of the year as well. It’s a discussion. Let’s walk through this process. Again, we recognize in 90 days this is not all going to disappear, and we are all making money again. It’s going to be a cycle and we want to be here for through entire the cycle for the remainder of the year.
Grant: There’s a lot of misinformation out there as well. And there are also a lot of people who theorize that if you take a deferment or a modification, that you will not be able to get a mortgage or a new loan for the next five years. How do you guys really treat it if someone needs to take a deferment or get a modification?
Melinda: I think that is a misconception. I do think that if you ask for a deferment and then you come back three months later with a fantastic opportunity and you want financing; I do think that that will be a little bit of a cloud. I think we must go way and above to explain why you took the deferment and why now you have the capability to buy something new. Because we do not get paid the principal or the interest. Let’s say you take the P&I deferment, we, the bank, end up eating the loss because we don’t see it until your maturity date, which could be two years, five years, seven years down the road. It could be very tricky if you are wanting to come back later on and ask for a loan.
Grant: So, you get an asterix put next to your name?
Melinda: Not so much an asterix, but it will be asked did this client take a deferment in 2020. I know there’s situations that you have to, I get it. And you may come out of this and at the end of the year, you find something that you can afford, and you’ve got the cash – – it’s going to take a lot more documentation. If you can avoid it and you can make it through this period or you can wait until June or July and it just isn’t better – – but you put in some of your own cash first to try to make it. It looks a little bit more favorable. But it is what it is. We understand it’s a pandemic issue. It is a worldwide issue. And we are here to be partners because we are. It’s just kept in mind that if you think you might want an extension of credit in the commercial world, it will be asked if you took a deferment.
Grant: The media likes to vilify banks and especially lenders and paints you guys as a villain. Why do you think that is?
Melinda: Have you watched dirty money? They don’t do the banks any favors, that’s for sure.
Grant: I know you guys are truly partners in the community, though. There are restaurateurs, there are little hardware shops, there are mom and pop shops all over Nashville that would not be able to exist without regional banks. For whatever reason that does not get out there into the world.
Melinda: Honestly, our politicians do not help us any at all either, especially with the Frank-Dodd Act and some of the things that happened in ’09 and ’10. The banks were the bad people. There are different levels of banking and it’s just truly understanding those different levels. But we have learned a lot. We have come a long way. It is a relationship. I feel I have great relationships with all my guarantors and borrowers and I have really tried over the last 30 years to make it a win-win situation for both the bank and the borrower.
Grant: What do you feel is going to happen in the credit markets later this year? For us, we are predicting a little bit of a summer bump where we’re having an amazing summer, but also then falling off, not a cliff, but falling off slowly but surely as fall and winter set in. Do you guys see the same thing happening with the availability of credit in the commercial world?
Melinda: Yeah, I think commercial will get very tight this year. I think it will be hard to lend, especially on larger credits. I feel the banks will ask for more cash in the deals, as we did in ‘08, ‘09 and ‘10 when we were coming out of the great recession. I do think that we will see a lot of tightening up through the end of this year and probably the first and second quarters of next year until we see how we come out of this. As you mentioned with restaurant owners operating businesses that are taking a hit this time along with the real estate owners – – it will be interesting. I think a lot of folks want to get out their house and are already planning their next trip. But then I think there are a lot of consumers that will not have the funds to do that. And, you know, I don’t know if businesses are going to bounce back as quickly as some people think they might.
Grant: I have learned a few new things about myself and one of those is that I really enjoy sitting in a loud restaurant with food in front of me, having a tasty beverage, I’ve really missed that experience.
Melinda: Yes, I agree, I do too. I miss the social part. I think we’ve realized we’re even more social than what psychologists have deemed us to be. However, I do think the middle class has taken a huge hit with this pandemic and that has probably taught them to save even more and to go back to basic values of eating at home and enjoying the simple things in life. And so, I don’t know if there will be a lot of consumer spending in the next 12 months.
Grant: Do you think that banks will start to acquire each other as a result of a little bit of a downturn in commercial lending? Is this an opportunity to consolidate or do you think new banks will form?
Melinda: I think that could happen. What we have struggled with here in Middle Tennessee with smaller banks is the deposits. Deposits fund loans and they tie relationships even tighter to the bank and to the relationship manager. And in ’09 and ’10, when we were coming out of the great recession and Nashville was really booming these last five years, banks were just like, go put the loans on the book, go put the loans on the book. And then as the markets trended up and we went into an inverted yield curve last year, deposits became very, very important. And we still had a huge loan demand. It put some banks into having a very large issue. And those banks are more vulnerable to have to merge to keep the doors open. For example, Reliant buying First Advantage, which was a smaller bank in Clarksville. The sweet spot is to try to get over 15 billion and then you can get away with some regulations through the Frank-Dodd Act. So, yes, I do think we will see a few of those mergers continue to happen as regulations will probably tighten even more after this.
Grant: So, it’s a race to 15 billion in deposits?
Melinda: Total assets.
Grant: I would say that’s a lot of billions.
Melinda: Yeah, it is. That is where banks get a little relief in the reporting and the regulations and in the way that they must reserve capital.
Grant: Is the PPP loan through the CARES Act a better alternative to forbearance, modification, or deferment?
Melinda: It can be. Deferment is for real estate investors or operating businesses to defer their loan. The PPP is specifically for payroll to keep people employed, interest expenses and other business related expenses to help the business owner stay alive so that when we get through this, they can reopen their doors and not file bankruptcy. It is a great program that President Trump has put together to help small business owners.
Grant: Have you guys done a bunch of those yet?
Melinda: We have. We have a great team of folks that worked many, many hours ever since they announced this to put together a solid platform to help our clients. And we rolled that out Monday. I have been super impressed, and it has gone very well so far.
Grant: How quickly do you think those PPP loans will get funded?
Melinda: Once they get approved, they will have funding within two to three days. It’s super quick. And I am again, extremely impressed with the third-party company that we went through to help us with our SBA loan requests for these PPP loans.
Grant: So, if you are a restaurateur or you own a small brick and mortar retail, the PPP loan is what you want to get first?
Melinda: Yes. And you need to go to the bank that you have your operating account through. That is very, very important.
Grant: Call your banker immediately and find out what your options are?
Melinda: Yes, exactly.
Grant: Times are different, and unemployment has spiked. The market has lost a lot of value. People are certialy not showing you the best parts of their personality. How are you guys handling that?
Melinda: We’re trying to be as empathetic as possible, transparent in telling the borrower that we are trying to do our best to help them and just having a good civic and moral backbone to get through it. It’s all that we can do at this point.
Grant: Lots of patience.
Melinda: It does take patience. I believe that the folks I have worked with have the wherewithal, the work ethic, and the morality to get through this. And I just try to reiterate that through the conversations I have with them.
Grant: This highlights the reason why you want to have a banking relationship. Having an actual banker for times like this becomes a saving grace.
Grant: Alright Melinda, this has been highly informative and a little bit intense. Let’s end on something fun. Tell us something we do not know about you. Like, are you a famous artist in your free time??
Melinda: No, I have no other great qualities – – I love to bowl. I have a decent bowling average.
Grant: Nice. You are a bowler?! I didn’t know that!
Melinda: Yeah, I once had a 192 bowling average.
Grant: Whoa. Average?
Grant: Oh, my gosh! I don’t know that I’ve ever had a 192 game! Oh, my gosh. You know I lived in the north for a while, so we were in Michigan, we lived in New York, I was born in Pittsburgh. And bowling is a thing in the north. I don’t think people realize that indoor sports reign king up there. I got decent at bowling, but 192, that’s amazing!
Melinda: When my kids were little, my husband and I needed something to do on a Saturday night and the bowling alley was great. My parents bowled in a league with us and the kids would either – – they had a little playroom, or they would hang out with us. And we did that for many, many years and I still keep it up and I enjoy it. It’s so competitive and it’s fun and great people too. And so, yeah, I enjoy it.
Grant: Wow, so not only are you my number one pick in my commercial lending draft, you are now my number one pick in my fantasy bowling draft!
Melinda: Ha ha ha, funny!
Grant: Melinda, thank you so much for coming by the studio today. Do you think you can come back in a couple of months and give us a quick update?
Melinda: I would love to. I hope that this helps somebody.
Grant: It absolutely is going to help clear up forbearance versus deferment versus modification. Let’s talk soon.
Melinda: Thanks Grant.