Jeff Judy

Jeff's Thoughts - August 17 , 2011

Repayment, Loss Mitigation, and Priorities


Recent issues of Jeff's Thoughts have focused on "alternative" sources of repayment. Note that I did not write, "secondary sources of repayment." My basic argument has been that it is all too easy to think, first, that with enough collateral when the deal is signed your bank is protected against a loss, and second, that collateral and guarantees are the best backstops to ensure loan repayment.

I'm trying to get past a black-and-white view, a pass-or-fail view. There is a more gradual path from orderly repayment from a borrower's healthy cash flow to default. And I have suggested that there are more options for supporting repayment of a credit along the way, long before we get to liquidating collateral.

But even if you embrace this broader creative approach to maintaining repayment and reducing any eventual loss, it is still possible to go astray.

The biggest problem: forgetting that the bank comes first!

Intellectually, we know that the bank's interests, particularly the fullest possible repayment of the credit, outweigh the borrower's interests. Baldly stated like that, it seems obvious..

Yet behavior often belies intentions. We all know that countless problem loans end up as charge-offs because the banker was thinking more about "turning the borrower around" than about getting the maximum possible cash out of the relationship as the borrower deteriorated. All of the strategies I have discussed for taking advantage of alternative sources of repayment are intended to help the banker get the credit repaid, not to save the borrower.

Now, it is true that most of the alternative sources of repayment I have suggested may benefit both the borrower and the bank. Unfortunately, if the borrower improves a little as a result of quick action by the bank, you can easily start thinking that you want to "keep the borrower going," when what you want most is to "keep the repayments coming."

Remember why you put those proactive responses into your "problem loan pre-plan" when you booked the credit in the first place:

In reality, everything after the "primary source of repayment," the cash flow generated by a healthy borrower, is just loss mitigation. When you see repayment as a spectrum that you monitor and manage throughout the relationship, not just at the beginning and the end, you establish your best opportunity for maximal loan mitigation (maybe even 100% mitigation).

Just remember that helping your borrower connect with resources to support orderly repayment, even temporarily, is not an attempt to save the borrower. It is an effort to serve your shareholders and protect your portfolio.