Kevin Graff

The Enduring Relevance: Exploring the Timelessness of the 5 C’s of Credit

The Enduring Relevance: Exploring the Timelessness of the 5 C’s of Credit 

By: Kevin Graff

As we begin a new year, the financial landscape is evolving at an unprecedented pace. Despite the whirlwind of technological advancements and the ever-changing dynamics of the banking industry, there exists a set of principles that stand the test of time—The 5 C’s of Credit. In this blog, we delve into the enduring relevance of these timeless principles and their fundamental role in navigating the complexities of the financial realm. 

Timeless, as defined by Merriam-Webster, is not restricted to a certain time or date. The concept of timelessness can be applied to many factors involved in commercial lending. While technological advancements in credit underwriting can make complex and difficult financial analysis seem easy, the basic tenets of commercial lending remain steadfast. These central principles included within Character, Capacity, Collateral, Conditions, and Capital provide the foundation for nearly every lending decision.  

Character: The Foundation of Trust 
The first of the 5 C’s, Character, remains the bedrock of sound lending practices. In an era dominated by algorithms and data analytics, the assessment of an individual’s integrity, honesty, and reputation remains unparalleled. The timeless nature of character evaluation ensures that trust, a currency more valuable than ever, continues to be a cornerstone in lending decisions.  

Capacity: Navigating Financial Waters 
Capacity, the second C, addresses the borrower’s ability to repay a loan. Despite the advent of sophisticated financial models, the ability to understand and analyze an individual or business’s capacity to meet financial obligations remains a linchpin in prudent lending. This timeless principle involves both art and science as borrowers face a continuously evolving economic landscape, proving its relevance in diverse financial scenarios.  

Collateral: A Tangible Safety Net 
Collateral, the third C, provides a tangible safety net for lenders. While technological innovations have introduced new ways of assessing collateral value, the fundamental principle of understanding the various nuances of pledged assets remains steadfast. The ability to understand how collateral may be impacted by changing market conditions ensures that this timeless principle remains effective in mitigating risk.  

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Integrity Loan Review Celebrates 5 Years in Business

Can you believe it? Five years have passed since we embarked on this incredible journey, and we couldn’t have done it without you. We are thrilled to celebrate our 5th year in business, and we want to take a moment to express our heartfelt gratitude for your support. This milestone not only represents our achievement but the trust and loyalty you’ve shown us throughout this adventure. 

 Our success story is incomplete without the remarkable people who have supported us from day one  — our customers. We want to extend our deepest gratitude to each one of you.  You are the reason we are here today, and we promise to keep exceeding your expectations.  

 And to our team – we want to extend our heartfelt appreciation to our consultants who have been a driving force in our success. experience, hard work, and dedication has allowed us to expand into five states across the Upper Midwest, serve over 50 financial institutions, review over 2,300 credit relationships, and almost $14 billion in total portfolio commitments.   

 As we celebrate this milestone, we’re not just looking back; we are also looking forward to the exciting journey ahead of us. We value your feedback, and we remain motivated to keep improving.  

 Our 5th-year anniversary is not just about our accomplishments; it’s a celebration of the relationships we’ve built and the community that surrounds us. Thank you for choosing us as your trusted partner, and here’s to many more years of growth, success, and shared moments. We look forward to continuing this next chapter with you! 

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Enhancing Appraisal and Evaluation Reviews

Reviewing real estate appraisals and evaluations can seem a mundane but required task in the commercial lending process.  The commercial appraisal and evaluation (valuation) review process[i] within community-based financial institutions includes internally prepared reviews, third-party prepared reviews, or some combination of the two.  Often, the internally prepared review is completed by less experienced financial institution staff as a part of their training process, while some institutions have a dedicated appraisal and review department.  Loan officers may also perceive the review as a necessary evil rather than a risk management function.  The significance of the appraisal or evaluation review should be considered as a part of the pre-funding due diligence and risk management process, however pedestrian the process may seem.

Valuation reviews are a standard and vital part of a loan file review for commercial real estate lending transactions.  Recently our loan review activities identified two situations where the compliance review completed by the financial institution did not identify material flaws with the information included in the appraisal.   Both circumstances originated with a flawed appraisal engagement letter which did not appropriately identify the subject property.  The reviews of these valuations did not detect the mismatch between the appraised property and the property identified in the credit approval pledged to secure the transaction.  The result of the deficient appraisal review led to lending decisions using market values that did not represent the collateral pledged.

[i] The Uniform Standards of Professional Appraisal Practice (USPAP) 2010-2011 edition defines an appraisal review as the act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment. In addition, Section 1473(e) of the Dodd-Frank Act amended Section 1110 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to require the federal financial regulatory agencies, Federal Housing Finance Agency (FHFA), and Consumer Financial Protection Bureau (CFPB) to issue appraisal review standards.

To read this full article, click here.

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The Not-So-Typical-Repo Man

The Not-So-Typical Repo Man: A Conversation with Jeremy Vang with Recovery Solutions 

Recently, Kevin Graff, President of Integrity Loan Review sat down with Jeremy Vang of Recovery Solutions.   Recovery Solutions is a fully insured and bonded nationwide commercial repossession and remarketing agency specializing in commercial-grade repossessions. Recovery Solutions specializes in ag equipment, yellow iron, trucks and trailers, coach busses, cranes, tow trucks, forestry, mining, industrial machines, medical equipment, luxury RVs, and motor homes.

Thanks for sitting down with me, Jeremy. Would you mind telling me a little bit about how you started Recovery Solutions? 

My wife Jessica and I formed Recovery Solutions together in 2015 and we rebranded, strictly focusing on commercial-grade repossessions after 20 years in the auto repossession side of the recovery industry. We noticed that the auto repossession industry was saturated with repo agencies that specialized in consumer vehicles, and nobody was really specializing in commercial-grade equipment repossessions, so we took the ball and ran with it. Recovery Solutions serves lenders of all sizes, ranging from small community banks and credit unions to small-mid-and large ticket leasing and equipment finance companies, attorneys and law firms, and truck and equipment dealers. Because I was able to form Recovery Solutions together with my wife, we are also classified as a woman-owned business.

If there is one thing that separates Recovery Solutions from our competitors and nationwide commercial forwarding companies, it’s the fact that we care about the overall well-being of our lenders and our lenders’ customers, our understanding of brand awareness and reputational risks, and our ability to repossess assets placed with reduced risk to the lender.

You mentioned that you specialize in commercial-grade equipment, do you have a specialty with a specific asset class? How does pricing work for the different asset classes for your business?

We truly specialize in all facets of commercial-grade recovery. We are most versed in ag and construction equipment, trucks and trailers, coach and shuttle busses, limousines, cranes, tow-trucks, forestry, mining, industrial machines, medical equipment, luxury RVs, and motor homes. We’ve even repossessed nail and tanning salons, restaurant equipment, and arcades, and conducted a full-on business closure of a 5-acre truck stop and restaurant once.

With commercial grade repossessions, pricing is typically broken down into weight classes. For instance, if a lender is dealing with mining or installed industrial machines, we try to quote these out to the best of our ability on a case-by-case basis as there will almost always be breakdown and deinstall costs. The one thing that separates consumer and commercial repossessions is this, no commercial repossession is ever the same and it’s hard to put an exact dollar amount on how much it’s going to cost a lender to repossess, deinstall, and transport a 1.5M Tube Laser for instance. The logistics that come with commercial repossessions can be very overwhelming.

To read this full interview, click here. 

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Underwriting with a Debt Yield Metric

Over the last few years, I have observed more frequent use of a debt yield calculation as a part of commercial real estate (CRE) underwriting. The reason is due to the simplicity of the debt yield formula and its higher degree of consistency when compared to alternative underwriting metrics such as loan to value (LTV) and debt service coverage ratio (DSCR). Even so, I have not observed the addition of a debt yield metric to the CRE lending policies of community-based financial institutions (CBFIs).

So, what’s the big deal?  

My curiosity as to how a debt yield metric could add value to CBFI commercial real estate underwriting led me to create the example below. The example identifies and highlights the differences when applying the LTV and DSCR metrics in the underwriting of a credit opportunity as compared to a debt yield metric.

To read this full blog, click here.

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