Why do banks say "No!"? The answer to this question may surprise you.
The fact is the bank and financial companies alike use "data". Where does this data come from is another article (or you can attend the free webinar-Why Banks Say "No" by Faith Jones, Esq. for details). The short story is, yes, the "credit bureaus".
Now, you have to separate "the credit bureaus" into two categories. First there is personal data, and the second is business data. Now, the compilation is completed at the same major data centers (i.e. Experian, Equifax, Lexis-Nexis, etc). Now, we are not focused on the many data companies, we are focused on these two different categories, 1. personal, and 2. business.
Our firm focuses on financing investors (companies), who are individuals, which means we have an emphasis on business data first, and then personal data second. Other may not do a lot of business, and have more or all individuals. Keep this in mind.
What is the difference - the FCRA - the Fair Credit Reporting Act. When you access business credit reports the FCRA does not conventionally apply. In other words the same authorization is not required to access business credit information as it is for personal credit information. Now, disclaimer, I did not say you should still not obtain authorization for a business information pull. But, if you did not, your not in trouble.
Next, if you pull personal credit and find inaccuracies, under the FCRA you can displace some responsibility on the credit bureau and have them initiate to correct the information. In contrast, this is not the circumstances with business data inaccuracies. Our firm has direct access to the business credit bureau, so when there are corrections, we have a process and tools for clients to correct the date BEFORE THEY APPLY for funding. Just as you would with personal.
However, the bureaus do not have to correct information on business aggregated data. More importantly, when I ask clients the last time the pulled their business credit report, non-out-of-ten-times, its "never". The problem with that is, if there is an LLC, you better believe the financing company or bank can and in most cases, will pull that credit. So, if you have an LLC involved, don't just look at their FICO, pull both.
Now, "Why Banks Say, NO". The direct answer is "data triggered flags". For this post we are going to focus on two flags. First, there is the high risk flag and the fraud flag. The data algorithms weight the address on an application and phone numbers on the application, inquiries, as well as the payment information. So many professionals are looking at the payment information, it seems that not enough focus is placed on the address, phone, and inquiries. Here is what I mean.
If a client-investor is using an LLC, they will have a registered agent (RA), and that RA will have an address. Did you know if the client-investor uses the RA address as their business address, which many do. Not all, okay. But, many do. Fact is that RA address can already be RED FLAGGED as fraudulent. This means the client will be flagged as well. And you will not know this if you only go by there FICO and personal credit report. The algorithm at the bank reports - DENIED. And we go blame the bank.
Its NOT the bank, its the data. It's not the banks responsibility to ensure the data is correct, its OURS as professionals to pull both reports and have the client review to ensure accuracy BEFORE WE HAVE THEM APPLY.
Next, on a 1003 application there are 260 individual data points - just in case you did not know. The next big issue I see are phone numbers. If an application is asking for a "Home Phone", tons of personal and business applicants will place their cell phone number. NO. no. no. The application asked for "Home" phone. It would be more beneficial for them to use a residential VOIP (voice over internet protocol-phone) number, and actually have a separate phone than a cell phone.
Why? Its a data point and it will detract from the overall risk profile. Now, the same is true for client-business. Do not use a cell phone, its the worst thing. When is the last time you have seen an applicant-business put a separate phone for the business, home, fax, and mobile? They are "data" points, and additional methods for the data aggregator to further verify the applicant.
Now, back to the business report. We find that near 100% of investors have never properly registered their LLC within the financial data system. So, essentially, the business does not exist in the data system. So, if it goes on an application - it scores a ZERO, and then there is only the personal guarantee, or personal FICO and signature. Its not the bank. Whenever there is an LLC, the formation in itself is a method the state and federal government uses to determine the method of taxation.
Now, data aggregators will pull information for filings at the Secretary of State Office, but, this does not mean they register the business at the four financial registration agencies. Hence, an LLC can be around for years, but, not essentially be seen by the bank when included on an application. So, the bank can only say NO based upon the fact that their is not a credit history.
Next, to register the LLC into the financial system is essentially FREE. But, it seems like no one does it. And in all fairness, clients are reliant upon the professionals they work with to educate them. But, there CPA and attorney have not seem to know because our firm advise these professionals and others how to get this completed.
In closing, what is the benefit? Business credit is said to be approved at 5x-100x greater amounts than personal. So, you can grow hundreds of thousands in credit under the LLC employer identification number (EIN) than you can under your personal social security number. Secondly, using credit under the LLC-EIN can shield the investor-applicant-client from personal liability. Boy, 100% have told me they wish they did this in 2008.
So, let's just recap. First the bank says "No!" because of the data they are held to using. But, the accuracy of that data is the responsibility of the client and their professional agent or advisor. And, it should be reconciled BEFORE application, and not after being denied.
Second, on an application address and phone numbers matter. They are "data points", and used to verify the applicant. And application is essentially a different form of KYC - Know Your Client documentation. And the KYC protocol is an "anti-fraud" process. So, if the address on the credit report don't reflect accurately as the application, it can work against the applicant. Using PO Boxes, Personal Mail Boxes (PMB's), and high turnover address locations, can backfire on the applicant.
If there is an LLC-EIN and its not properly registered in the financial system, it will work against the applicant. An LLC formation is for government taxation, not financial profitability-registration. And financial registration can be accomplished for free.
Next, if there is an LLC, you want to pull both personal and business reports. Not just personal. There are many ways today to correct a personal report, but you will need help correcting a business report. The time a professional takes to obtain those resources will single them out from the many. 100% of the investors in which we pulled their business credit had not had anyone do that. Moreover, every report required corrections to be made - 100%.
The 1003, whether used for Residential or Commercial has hundreds of data points. If the application asks for specific information, complete it, correctly. Do not allow a client to put a cell phone number for every box. They can cancel the numbers if they want after they get their funding if they choose.
And finally, if a client has excessive inquiries CHALLENGE THEM. One client some years ago had 41 inquiries and she was a senior. Now, we could see more on our commercial reports that she could see on her personal self pull. At the time I believe the penalty was $1,000 for accessing a credit report without proper authorization. We turned it over to an attorney to assist her write letter to each company under the penalty of proof they had the permissible right to access.
Now, over 50% did not. This means that they damaged her ability to obtain funding, and that led to a different use of the attorney. She had been to so many professionals that kept getting her denied.
Next, how many times have you said, "it's a soft pull" and will not hurt your credit? And how many times have you actually went and checked "how the system coded your pull"? We found times that for some reason it still showed up as a "hard pull" and docked, reduced the credit score. So, again, it was not the bank deciding NO, it was the data.
If you have any questions, please feel free to reach out via email at executivefinancier@GoldsmithandFreudenthal.com and reference this article on ActiveRain. And remember, banks, finance, and mortgage companies only make money when they do loans. Its not them saying NO all the time, its the data.
Client experience: A married couple applied for a $417,000 loan. They were denied. They came to our group and we pulled a bank level report to see what the bank saw in the data. It was noted that the business name at the Secretary of State we being misreported. They used our correction tool and corrected it on the business credit report. Next, they proceeded to re-apply, and they were approved. The only change was that the algorithm could not reconcile their LLC name, it flagged and was denied. Upon correction, they were happily approved.
Friends and colleagues - DATA MATTERS and so do you!
Be Well!
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