August 16, 2022

You’re the Boss: Did Wells Fargo Answer Your Lending Questions?

Marc Bernstein and Douglas Case, the Wells Fargo's two top executives for small-business lending.Peter DaSilva for The New York TimesMarc Bernstein and Douglas Case, Wells Fargo’s two top executives for small-business lending.
The Agenda

Two weeks ago, in tandem with our conversation with two Wells Fargo small-business lending officers, Marc Bernstein and Doug Case, we invited You’re The Boss readers to submit questions for the executives. Today, we present their responses.

We selected the questions from the comments posted by readers. We only forwarded clear questions specifically about small-business lending (and not questions about, say, deposits or complaints about customer service), and we edited them for clarity or space. In some cases, readers posted comments that suggested interesting questions, so we formulated those and sent them to the Wells Fargo executives as well. Their answers have also been edited for space.

Did they answer the questions to your satisfaction? Tell us what you think, using the comment form below.

Q. Reader 7themick is very pessimistic about economic recovery and small business: “The rush to lend to this segment may result in a relapse of portfolio quality, only this time there would be no TARP because the government is out of money.” Does he have a point? If, as some economists are now predicting, we’re heading into a double-dip recession, should that mean less lending, rather than more?

MR. BERNSTEIN: Yes, the economic recovery is slow, but we are lending, and more so than a year ago. We don’t foresee any substantial changes to our current lending criteria even if the economy were to weaken in the near future. But lending could be reduced if, because of the weak environment, small-business owners become more cautious about borrowing to grow their business or to make other investments or if a slower economy reduces revenues and profits for some small businesses, which also reduces their ability to support additional borrowing.

Q. From Shylock: “Smaller businesses, especially those under $1 million in annual sales, are what most people I know consider ’small business.’ What is Wells Fargo doing specifically for these smallest businesses? It seems pretty easy to show an increase in small business lending the larger you make the threshold for ’small.’ Will you provide more detailed information on your lending to businesses under $5 million, under $1 million, and start-ups?” For more specificity, The Agenda suggests percentage changes and total loan dollars for 2009, 2010, and the first quarter of 2011 (compared to the same time last year).

MR. BERNSTEIN: We take great pride in our long history of being a leading lender to America’s smallest businesses. Our industry leadership in small business is why the World Bank Group has invited Wells Fargo to work with banks in developing countries around the world. We’ve worked with banks in Africa, Asia, the Middle East, and elsewhere to help bankers reach out and increase lending to the smallest businesses in their countries.

There are various reports that measure banks’ lending volumes. The most relevant to your question about business size would be the federal government’s Community Reinvestment Act data. C.R.A. uses the dollar amount of the loan to determine whether it is a small business loan. For eight consecutive years, Wells Fargo is America’s No. 1 small-business lender for loans less than $100,000. In 2009 (the most recent C.R.A. data published by the government) we extended more than 630,000 loans with originations of $100,000 or less. The average loan size was about $30,000.

While we do provide many start-ups with credit cards, we do not generally lend larger sums to brand new businesses. Studies show that about half of new start-ups close in their first three years, and it’s difficult to predict up front which businesses will succeed and which will fail. So we require a business to be a minimum of at least two years old before we’ll consider providing a large line of credit or loan, although we do sometimes make exceptions for customers with a strong, long-standing consumer relationship with Wells Fargo.

Q. NathanielB writes that “my recent experiences with the Main Office Commercial Loan Vice President was fraught with delays, procrastinations, and an eventual response that the designated location was declared to be within a ‘no loan’ area and we had spent over three months negotiating this loan.” Does Wells Fargo really have “no loan areas,” and if so, what defines this territory? And if not — since I think no-loan areas are illegal — what do you suppose that banker might have said for this prospective borrower to construe the rejection as red-lining?

MR. BERNSTEIN: We’re committed to doing what is right for our customers and upholding sound underwriting practices. Wells Fargo will only approve an application when we believe the borrower has the ability to repay the loan. We do not have “no loan areas.”

Q. JRG, who seems to have experience in large-bank lending, writes about credit scoring: “Loan scoring is based on complex models that desire a certain return outcome based on assumed risk factors and loan pricing. Likely included in these models are other big picture factors such as industry and geography. A borrower can have good individual credit characteristics but if you are a general contractor in Las Vegas you could get declined for a new loan or asked to leave the bank only because the bank has too much contractor exposure in Las Vegas and want to bring that exposure down. This concept is called ‘portfolio management’ and is similar to managing concentration risk in an investment portfolio.”

In our conversation you acknowledged the role such big-picture factors play in credit scoring, but is our commenter right that they could knock someone with otherwise good credit out of the running for a loan? Does Wells Fargo use credit scoring not (or not just) for determining an individual borrower’s likelihood of default but for managing the risk and return across the portfolio? Is there, in your view, a difference between the two?

MR. BERNSTEIN: When considering an application for credit, we do take into account the challenges facing a given industry and the nature of the economy of a particular region. Continuing with the example in the question, contractors in Las Vegas were indeed having a very difficult time after the housing bubble collapsed – and, before granting a loan to a contractor in Las Vegas, we would want to have reason to believe that the business would be able to repay the loan to offset those very obvious risks. “Concentration risk” is a legitimate concern for lenders; however, Wells Fargo has a diversified portfolio of small-business loans in all 50 states and across hundreds of industries. In the 16 years I’ve managed our lending business for loans under $100,000, we’ve never once declined a small business loan application out of a concern that we have too many loans already in that area or that industry.

Q. Reader beaconps asks, “With all this performance data, does Wells Fargo counsel any of their small business customers? Many start businesses with a skill but that skill is not business finance.” I’ll add to that: What sort of counseling does Wells Fargo make available? Is it ever mandatory?

MR. CASE: Providing financial education and advice is at the center of our work at Wells Fargo. We know many business owners don’t start with a strong understanding of business finance. Our bankers can help business owners understand cash flow and credit so the owners can focus on running their businesses. We recently launched a comprehensive resource center called the Business Insight Resource Center, offering a video library covering topics from taxes and retirement to cash flow and understanding credit. The site also houses hundreds of articles and several webcasts that address a wide range of topics related to running a business.

Q. Rick A recounts trying to get a $7,000 loan from Wachovia a few years ago to buy two computers for his business. “I am a sole proprietor, and in spite of having pumped several million dollars through my Wachovia checking account in the last 15 years, I was told to use my high-interest credit card.” Despite your stated commitment to loans under $100,000, is there a minimum threshold for a loan necessary to justify your bankers’ time and resources? Are standards for credit-worthiness lower, or higher, when it comes to small-dollar loans?

MR. BERNSTEIN: I can’t speak to the experience you had at Wachovia several years back but what I can say is that Wells Fargo welcomes the opportunity to help you with your financial service needs, including potentially credit. Since your business finances are private and confidential, we would welcome the opportunity to connect offline so we can see what we can do to help. There’s no minimum size for us, and we do a lot of very small loans.

Q. Finally, a question from a You’re The Boss colleague, Jay Goltz: “I would like you to do everyone a great service. How about a look behind the curtain? Most people do not know what a bank is looking for when they consider a loan, or they do know but they don’t know the specifics. For instance, The “Five C’s” of credit are pretty well known — character, cash flow, collateral, capital, and conditions. What are the minimal requirements you are looking for? Let’s say someone wants to borrow $100,000. The cash flow, collateral and capital are somewhat objective. That is the easier part. What about character? Does a previous bankruptcy count against them? Credit score? Doesn’t go to their kid’s baseball games? Married four times? What about conditions? From my experience, many people trying to borrow money are not even close to qualified, but they don’t know it. If you answer these questions I believe that many people will have a better idea of where they stand. Perhaps they can work toward improving their situation, or at least stop wasting time. When you answer, can you please, just for a moment, pretend that there are no lawyers or P.R. people to answer to. I’m sure everyone will appreciate it.”

MR. CASE: The Five C’s help us develop a profile of the applicant. There is no specific weighting — the focus is on your ability to repay the loan. If you have derogatories on your application, such as a 60-day payment delinquency, these may hurt your chances of obtaining credit. In this case, you’ll want to work on cleaning up your credit report — both business and personal. There’s no magical formula for capital, but a substantial personal stake will help show that you’ll do everything you can to make the business successful and repay the loan.

You could add a sixth “C” to this list: customer. If you have an existing relationship with us, it allows us to access more information on your character and ability to manage your financial situation. For example, establishing a deposit account with us can be an excellent way to show your cash flow firsthand.

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