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Moving the Pricing Process Forward

As you’ve probably noticed by now, we really like to use stories to help make our points when discussing our pricing philosophy. So we’ll start this chapter with another one – a hypothetical step-by-step account of a borrower trying to make his way through the traditional loan process. Along the way we’ll keep track of the time spent for each step, as well as the total process time.

The Traditional (Slow) Borrowing Process

Step 1. The borrower comes to the bank to discuss a loan request. If they are experienced borrowers they will bring most of the financial documents needed. (If not, the bank will request financials before discussing any terms, adding a week to the process right off the bat.) At this meeting, the bank will usually quote something from the rate sheet or standard starting structure. If the borrower wants anything different, the lender replies, “Let me check with my boss.”

Step 2. The lender consults with his boss, who says, “If the underwriting is good and the deal hurdles (i.e. it has a sufficient ROE when plugged into the pricing model) then yes, we’ll do that.” Invariably, a request is then made to the borrower for additional documents. (1 week for step, 1 week total.)

Step 3. The borrower gathers the additional documents and sends them in to bank. (1 week for step, 2 weeks total.)

Step 4. The bank begins the underwriting process. The credit department enters the deal into its pricing model and gets a result that is below the hurdle. The lender goes back to borrower: “We can’t do those terms. If the rate is x%, then we should be good.” (2 weeks for step, 4 weeks total.)

Step 5. The borrower counters, and we start again with the “Let me check” process. The deal goes back to the boss and the credit department, where they have to decide whether to take less or lose the deal. In this scenario they take less (which they usually do). The decision takes another two weeks. (2 weeks for step, 6 weeks total).

Step 6. Now the loan can go to committee for approval and full documentation before closing. (4 weeks for step, 10 weeks total).

In summation: You have roughly 10 weeks of time spent to produce one below-target deal and one rocky relationship with a disgruntled borrower.

This is an excerpt from the book, "Earn It"

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