If we got a dollar every time we heard a less than truthful explanation from a borrower describing terms and pricing obtained from a competing bank we wouldn’t have to work. We have heard hundreds of borrowers tell us that they obtained fixed-rate loans at X% interest for ten years, only to find that the LOI expressly indicated a five-year reprice or a 5-1 ARM. Of course, not all deceiving comments we hear are flat out lies - borrowers relay less than the full facts and are often not motivated to inquire about the details. Borrowers are motivated to obtain the most advantageous terms and the most competitive pricing from lenders, and they often pay little attention to details in term sheets and loan documents. Good bankers must understand how to identify deception, and, most importantly, how to obtain full facts from clients.
The Classic Example
We recently competed on a $4.9mm term loan opportunity against an insurance company (Genworth Financial). Our banker submitted an aggressive offer but not as thinly priced as the loan proposed by the insurance company. We wanted to contrast our offer from Genworth’s and the topic moved to prepayment provision. The borrower was adamant that the insurance company loan was prepayable anytime with a 1% fee over the entire 10-year term. We asked to see the Genworth term sheet, and saw the provision listed below:
We cannot blame the borrower for concluding that the prepayment provision was a flat 1% - that is what the first line reads. However, the borrower conveniently missed the phrase “greater of” and did not read the full details of the term sheet. Next to pricing, deception on the prepayment provision is the second most common. In this case, on page 13 of the term sheet, the real ugly details emerged (as shown below).
But can anyone blame the borrower for avoiding an equation with ten parentheses? If the borrower had done the math (which we did), they would have known that the prepayment provision was an 18% penalty on day one, and not 1%.
How to Detect Borrower Untruths
Borrowers distort the truth for different reasons – but mostly to extract better business terms, to protect other people, to avoid conﬂict, or exaggerate their standing. The reason that bankers must be able to discover lies is not to call borrowers out, but to get as much of the truth as possible to become better bankers.
We found a company called Calibrate which works with financial institutions to offer screening and training services for information elicitation techniques – essentially teaching financial employees how to identify deception and how to obtain truthful information from customers. Calibrate’s CEO, Pamela Meyer, in fact, wrote a book called “LieSpotting” that explains the techniques for obtaining the truth from customers.
Meyer taught us a few basic concepts that we feel all lenders can use in avoiding being deceived by borrowers, and we have started using some of these techniques ourselves with good results. Here are the basic methods that we use:
The Benefit of the Doubt: If a prospect is worth doing business with, that prospect is also worth the benefit of the doubt. We want to have a rapport with our customer, and we want to keep an open and inquiring mind.
Non-confrontational: We do not accuse our prospect or customers of lying. It is not worth the conflict, and it is not professionally productive. We want to discover the truth instead of uncovering lies. We ask questions, challenge opinions and investigate facts to get as much truth as we can.
Finding Motivation: If we do uncover deception, we don’t accuse the borrower. We would prefer to find out what motivated the borrower and understand their point of view. Further, we consider how we might change the way we bank because lying takes energy and high motivation and our job is to understand what motivated the borrower so we can become better bankers.
Customers will continue to try to deceive bankers to obtain better loan terms, but good bankers can use simple techniques to investigate the facts and still try to help borrowers. In our scenario above with the competing Genworth offer, what came out of our discussion is that the borrower was too busy to read an entire 14-page term sheet from Genworth. If we shoved the prepayment provision in the borrower’s face, we would have offended the borrower and lost the deal immediately. What we learned from the borrower is that he was time-starved and did not want to pay attention to detail, and wanted a trusted advisor who could summarize for him the terms and pricing of the loan. The borrower wanted a lender that would show him a simple and concise term sheet, quick closing timeline and simple explanation of the required documentation – all requirements that we, as good bankers, could fulfill.
Submitted by Chris Nichols on May 16, 2018