The end of the Commercial Lender

MyBanker.ai was built to help borrowers target their loan requests to banks whose credit policy was a match for the loan request. Simple right? This is what human loan brokers do. With some luck we got it rolling. However, Google Notebook has come along and destroyed it.

Here is a loan request that was presented to Google Notebook and the response generated based on the credit policy.

In a few seconds, Google reported the following:

Loan Request Policy Exceptions and Concerns

This multi-family investment property loan request presents several exceptions and concerns regarding the lending policy:

Policy Exceptions:

• Loan-to-Value (LTV): The borrower is seeking a $1,350,000 loan on a $1,500,000 purchase price, resulting in a 90% LTV. This exceeds the policy's Investment - Multi-Family target LTV of 75%.

• Amortization: The requested 30-year amortization surpasses the maximum 25-year amortization allowed for most commercial real estate loans.

• Fixed Interest Rate: The request for a fixed interest rate for 5 years falls within policy guidelines. However, the policy advises verbal review with Treasury Services for fixed rates exceeding seven years. Additionally, the policy generally favors floating rates tied to an index like Prime.

Policy Concerns:

• Environmental Issues: The property's history as a communication factory raises concerns about potential environmental contamination. A thorough environmental risk assessment, guided by the Environmental Risk Policy, is essential. The assessment should determine the necessary due diligence, potentially involving on-site inspections and specialized environmental reports.

• Debt Service Coverage Ratio (DSCR): With a projected cash flow of $100,000, the ability to meet DSCR targets requires careful evaluation. The policy outlines specific DSCR targets for different property types, like the 1.25x pre-distribution and 1.10x post-distribution target for Investment - Multi-Family properties. The loan amount might need adjustment if the projected cash flow doesn't support a policy-compliant DSCR.

• High Volatility Commercial Real Estate (HVCRE): Given its nature as an acquisition, development, and construction (ADC) loan for multi-family real estate, this request falls under the HVCRE classification. The HVCRE designation necessitates a higher capital reserve for the lender (150% risk weight compared to the standard 100%). A detailed HVCRE analysis using the "HVCRE Determination spreadsheet" is required to confirm the classification and assess capital adequacy.

I also asked Google for recommendations on how to modify the request to make the loan policy compliant. Here's what it said:

Loan Modification Suggestions

Here are some adjustments to consider to align the request with the lending policy:

• Increase Down Payment: The borrower could increase their down payment to lower the LTV to 75% or less, aligning with the policy target for Investment - Multi-Family properties. For example, a down payment increase to $375,000 would achieve a 75% LTV ($1,125,000 loan on a $1,500,000 purchase price).

• Reduce Amortization: Agreeing to a shorter amortization, such as the maximum 25 years permitted by the policy, would bring this aspect into compliance. A shorter amortization also results in a lower total interest expense over the loan's life.

• Floating Interest Rate: Instead of a fixed rate, the borrower could consider a floating interest rate structure linked to an index like Prime. This aligns with the policy's general preference for floating rates on commercial loans and provides flexibility in a changing interest rate environment.

Additional Notes:

• Thorough Due Diligence: Due to the property's prior use and potential environmental concerns, comprehensive due diligence is crucial. Engaging environmental specialists and legal counsel experienced in commercial real estate transactions is recommended.

• Recourse and Guarantees: Depending on the borrower's financial strength and the project's risk profile, the lender may require personal guarantees from the borrower or additional recourse provisions in the loan documentation. This helps mitigate risk for the lender, especially for loans with higher LTVs or those involving environmental concerns.

By addressing these policy exceptions, concerns, and modifications, the loan request can be structured for better alignment with the lending policy, potentially leading to a favorable outcome for both the borrower and the lender.

I can see a modified version of this test resulting in "Deal Screen Memos" that are better than ones prepared by lenders or credit analysts. Take note! This AI thing is for real and will be massively disruptive. MyBanker.ai is signing off. Disrupted in a few months by a tech giant.