Patience and openness keys to navigating loan default woes
Lori Purkey has been professionally involved in negotiations in commercial loan default situations for almost 23 years and, in her opinion, the difficult situation now facing banks and some of their creditors will take time to resolve.
“It takes a long time to work through a downturn,” said Purkey, principal at Purkey and Associates PLC on East Paris Avenue in Grand Rapids, a law firm that mainly represents small and medium-size banks in attempts to collect on defaulted loans.
Although she has worked in both consumer and commercial loan default negotiations, “right now I’m doing mostly commercial,” she said.
Purkey, who was previously with the Miller Canfield law office in Kalamazoo, said she remembers the late 1980s and early 1990s when many farmers were defaulting on loans, and other times when defaults mainly involved specific sectors in industry.
“This time, it seems to be a much broader base. Lots of people are having difficulties, and it’s not one-industry driven,” she said.
“The bigs are filing (for bankruptcy). I’ve got hospitals filing. I’ve got the mom-and-pop sandwich shops filing. So it really is very broad based,” said Purkey.
She said the unusual severity of this recession and the fact that there is now “a lot of debate about whether we’re coming out or not” are making it more difficult for companies in default and their creditors. Recovery is “slow at best, but it takes a lot of years to work through (the defaults from) even a short downturn, so the fallout from this will last for an extended period of time.”
“There are people we are still dealing with today who say their first real hit was after 9-11, and they’ve never fully recovered from that,” she added.
Purkey is a member of the American Bankruptcy Institute and also is on the State of Michigan board of the Risk Management Association.
The ABI reported recently that total bankruptcy filings across the U.S. in 2009 showed a 32 percent increase over 2008, but when looking at business bankruptcies alone, the increase was 40 percent.
In May, ABI reported that business filings for the three-month period ending March 31 totaled 14,607, a 2 percent increase over first quarter 2009. The first quarter 2010 business filing total represented a 2.8 percent decrease, however, from the fourth quarter 2009 total of 15,020.
Some businesses were determined to survive and “limped along and hung on” over the past two years by expending their assets, said Purkey, “but they’re still in the same place — which is, they can’t pay” on loans that are due.
“We expect (the fallout from this recession) to take several years to work out,” she said.
“It’s hard to save enough money to survive that long of a downturn,” she said. “How do you keep your company operating when 30 percent of your business goes away?”
From her position as a representative of the banks, Purkey would offer this advice to businesses that may be headed toward default:
“Don’t play ostrich. Don’t stick your head in the sand and pretend it’s not happening. If you’ve got a problem, you need to call your banker and deal with the problem. If you are pro-active, I believe you get a better reaction from the bank than if you end up being difficult and refuse to talk to the bank or are uncooperative in terms of providing them with information.”
“My bank clients generally want to work with people; they really would prefer not to take stuff back,” she said. But “quite frequently, people either want to just hand you the keys and walk away, or they don’t want to talk to you at all. In both of those situations, there really isn’t much a bank can do except take back property and try to resell it.”
Purkey noted that there is a lot of stress on people in banking now, and people in bank management have to “adjust how they look at things.”
A lot of the stress has to do with the fact that a property that was appraised two years ago is now typically appraised “drastically lower,” meaning the collateral value on existing loans is shrinking.
“That’s hard to get your head around,” she said.
“I try to tell my bankers to be patient,” said Purkey. “They’ve got to pace themselves; this is a long process and there’s a lot of pressure to do something right now. There is a definite strain on the system.”
Purkey said the “work-out people” — the individuals within a bank who specialize in trying to work out the most favorable outcome for the bank when a loan is in default — “are not the largest department at a bank.” She explained that when a default on a loan reaches a certain point, the original loan officer is removed from the situation and the defaulted loan becomes the responsibility of a “work-out” person, sometimes referred to as a special assets officer.
With the volume of defaults these days, banks are drafting people on their staffs to handle things they’ve never done before. “The system is really pushed pretty hard right now,” said Purkey. “I try to tell banks to be realistic about what they can do with some of these deals, and try to be patient with themselves, because the burnout of these people is pretty high. They have to handle a lot of work.”
Purkey added: “You hear a lot about the big bad bank, but the big bad bank is made up of a lot of people just trying to do a good job. They take a lot of guff, too.”
Purkey has been on the other side of the table, facing the banker. She said sometimes she will contact a bank, trying to negotiate a payoff for a client, “and I can wait months to get it. And sometimes I have to remind myself to be patient. At other times, I think, ‘The system has got to get better at this.’ But this downturn has been difficult for people to handle,” she said.
Property values are key to commercial/industrial loan collateral, and that is a continuing problem within the financial industry.
“From the appraisals that I’ve seen, whether its residential or commercial, property has seen a significant decline in value over the last couple of years,” she said.
Industrial property in particular, she said, faces the additional hurdle of an “environmental question,” meaning there may be some environmental contamination that further reduces the value of the land.