And You Thought The Purpose of a Bank Was to Make Loans?

I’m no economist or banker, so I occasionally labor under the delusion that banks are supposed to lend money to credit-worthy people. Of course, they diluted the definition of "credit-worthy" a few years back. That ruined their liquidity. Then the Feds stepped in with the Troubled Asset Relief Program.

Silly me, I had also thought TARP was partly aimed at restoring banks’ ability to lend money again.

Read the following (real) tale of woe from a qualified would-be borrower–let’s call her Jane–and ask yourself why Wells-Fargo would be so hesitant to lend.

For a clue, look to the end of Jane’s tale.

Jane’s Tale: If I Can’t Get a Mortgage, Who Can?

Last spring my sister and I decided to build an addition onto our vacation home in Northern Minnesota. Given today’s economic climate, we knew it wouldn’t be a cakewalk but we had no idea what a nightmare lay ahead.

Our family has owned lakefront property on Lake Superior since 1971. It’s prime vacation area with large million-dollar+ homes built on either side. Our parents deeded us the property 20 years ago, mortgage already paid off. After our mother died last year, we decided to build an addition. We hired an architect and a contractor with a long and credible reputation and a crew ready for work. We looked for a bank that would provide a construction loan for $250,000, for conversion to a mortgage when construction was completed. We went with Wells Fargo in Duluth. Their banker told us a loan was possible, but we’d need to open a business account first. My sister deposited $30,000.

Two weeks later, I was in the bank’s mortgage department armed with my loan application and identification; 2007 and 2008 tax returns; pay stubs; bank statements; property tax and home insurance records on this and my primary residence. He soon persuaded us to quit claim the LLC. I would become the sole applicant for the loan because I was an “ideal customer.”

Here’s my profile:

  • My income is in the top 10% of U.S. households; I’ve been a senior executive for ten years with an international NGO;
  • I own a car and home in the NYC area and paid off my mortgage in 2001;
  • I have one child in college and another who has graduated and is self-supporting;
  • I have two credit cards which I pay in full every month, my credit score is 775;
  • I have liquid assets worth more than the value of the loan; my retirement account is substantial but not lavish after the 2009 freefall;
  • The title search is clear and the appraisal of the lakefront property is $520,000.

The bank then required me to close the business account and open a personal account. I transferred the $30,000 and added $5,000 for good measure. I requested and got written permission for an “early start” on the construction because we needed to get the foundation poured before the Minnesota winter set in. For the next two months I endured slow torture at the hands of Wells Fargo and their big, bad “underwriter.” They peppered me with dozens of demands for information and ridiculous questions (Q:“Where did the $30,000 deposit come from?” A: “From the Wells Fargo business account you required me to open and then close.”). I was asked to fax my driver’s license four more times and to disclose the terms of liquidating my 403B.

When I was asked to explain why I made a late payment on my VISA bill in February of 2002 (7 ½ years ago!) I blew my top. For seven long weeks I was told that if I just met a few more conditions we could go to closing. These requests came from various Wells Fargo offices around the country – and were often redundant. When I asked to speak with the underwriter directly I was ignored.

Meanwhile, we were continuing to pay cash to our contractor so that our beautiful house could go up before winter. I reminded the banker that every delay in closing meant that I would be borrowing less money and they would earn less interest. Did they want to make a deal or not? We set a closing date of October 16. Ten days before, I had a conference call with the mortgage banker in Duluth and the Senior Relationship Manager in Minneapolis. I reminded them that I was flying out to Minnesota so they needed to tell me exactly what I should bring with me for the closing. The answer was “only your driver’s license.”

On October 15, hours before I was to board my flight for the scheduled closing, I was presented with several more conditions that had to be met (Q: “Could I explain the large deposits made into my Citibank account in the last month?” A: “You’ve seen my paystubs; that is my income.”) and then “we should be able to close in five days.” The banker’s e-mail said, “I imagine having been run through the gauntlet…that it is doubly frustrating to have to provide so much detail when you are clearly the kind of borrower any bank should love to have.”

At that point I realized I was never going to get a loan from the mortgage giant Wells Fargo, nor are they seeking ideal customers who pay their loans. Happily, our architect is talented and trustworthy and our contractor is honest and hard-working. Those business relationships have been highly professional and free of impediments. We can finance our second home without paying Wells Fargo $50,000 for the privilege of lending us money. But IF I CAN’T GET A MORTGAGE, WHO CAN?

No wonder we have a credit crisis in this country!




Wonder why Wells-Fargo was so unwilling to lend, and unwilling to talk about it? Here’s a clue.

It was announced a couple days ago that Wells Fargo bought its way out of TARP, including its restrictions on executive pay, etc. To get there, as I understand it, they had to restore their loan-to-capital ratio. One way to do that is raise more capital; another is to make fewer loans.

Draw your own conclusions, and share them here.


15 replies
  1. barbara garabedian
    barbara garabedian says:

    I’m unsure where or to whom to direct my anger… the biggies or the gov’t  for allowing them to continue those practices. Last nite I heard on NPR that the Huffington blog was advocating people moving their $$$ from the large conglomerates (Wells Fargo, Citi, Bank of America, etc) to small community banks, as a form of protest that might have an impact. Not sure that will do it but at least someone is suggesting something to be done to voice our anger (they said the blog had some outrageous number of hits in a single day)…bad enough that we had to bail the biggies out but to do that & then the Gov’t allows them to continue to not lend out $$$ (to people who are a good credit risk) is just unconscionable.

  2. James A/ Boyd
    James A/ Boyd says:

    Good Morning Charles,

    As a devoted reader and fan, your 1/07/10 post intrigued me.  I fear that it is one of those "and now the rest of the story" tales.  I am a Trust Banker who ranks  in the top 1% of sales nationally ($1.1 mil in fee income in 2009) utilizing/applying your concepts to trust-based selling.  I also know just enough about commercial banking to be dangerous, but what I do know is that: (1) There is no such thing as a loan-to-capital ratio (at least that has any meaning from a regulatory or balance sheet perspective); well managed banks try to keep their loan-to-deposit ratio as high as possible with quality credits  -generally at 85-90% and higher; and (2) The questions about "where did the $30K deposit come from" and "can you explain the large deposits into my Citibank account" are neither silly or intrusive in the eyes of the Federal regulators.  In fact, under Federal Customer Identification Procedures (mandated for all new relationships), they are REQUIRED questions.  That does not make them always appropariate, but don’t fault Wells.

    From the facts presented in the article, I have to conclude that either Jane was dealing with collective fools at Wells – not one of my favorite banks, but not populated with complete idiots either – or there is something missing from the story, on both sides.

    I would be interested in a F/U from either Jane or Wells.  Keep up the wonderful messages.  I pass them on to my associates with the hope they liosten and learn.



  3. Charlie (Green)
    Charlie (Green) says:


    Thank you for your most judiciously phrased suggestion that I’m stretching the boundaries of my knowledge.  I humbly accept your corrections.  There’s a reason I put in caveats about not being an economist or a banker–I am often reminded that on any topic I blog about, there will guaranteed be several readers out there who know more about the subject that I do.  Thanks for saying it so nicely, and I hope you’ll continue to keep me honest.

    That said, enlighten me.  Didn’t TARP require equity to be raised to replace TARP funds?  And isn’t the reason for increased equity to bring banks into line with regulatory requirements of the Fed concerning asset-to-capital ratios? (Tier-1,Tier-2, etc.).  Admittedly a loan-to-capital ratio is not the same as an asset-to-capital ratio, but if loans constitute a significant chunk of assets, then to that extent aren’t we talking about the same thing? 

    More broadly, didn’t the TARP program impose some kind of restrictions on leverage, liquidity et al?  And don’t loans affect those ratios?  And if so, and if not that ratio, what ratio was it?  Where have I gone astray in my portrayal?  It’s an honest question borne of honest ignorance.

    I think you’re right that the full story is not out at all–else Jane would have gotten an explanation.  And while I generally favor incompetence theories over conspiracy theories (and agree with you that Wells-Fargo is hardly populated by complete idiots), in this case I lean the other way.  I wish I knew the full story, but I’m with the general population on this one, e.g. Barbara, who clearly find the lack of transparency about the no-loan policy to be suspicious.

    An hour later.   This from the San Francisco Chronicle on January 1, Wells Fargo Top 4 Execs to Get Stock Grants:

    "The stock awards come on top of stock-based salary increases worth nearly $14 million for the same four executives announced in August. That boosted CEO John Stumpf’s salary to $5.6 million, more than six times his 2008 base pay. The company said at the time that the raises were intended to move the leaders in line with industry pay averages. The executives couldn’t sell that stock until Wells Fargo paid back the TARP loan." [emphasis mine]



  4. John
    John says:



    As usual I enjoyed your post. As I was reading the post about all of the different accounts that were opened I was wondering how many commissions were earned on the various transactions.

    Sales executives and incentive based employees forget sometimes that earning trus will also earn more money over time.




  5. Doug Cornelius
    Doug Cornelius says:

    I’m going to have to echo the thoughts of Mr. Boyd above. There are lots of red flags in this story that makes it a bad example. First, I want to make a disclaimer that my company has many business relationships with Wells Fargo.

    The first red flag is the mention of an LLC. That moves the loan process from the mortgage department to the business group. A group that is in the business of evaluating credit risk and capital, not home renovations.

    Then moving title to the property and cash during the application process is another red flag. Although legitimate in this case, those are red flags for mortgage fraud. Since the housing bubble has just exposed lots of mortgage fraud, banks keep a close eye on these movements.

    Another red flag is that Jane was looking for a construction loan. They are much more complicated that a typical purchase-money mortgage or refinancing. They are higher risk loans with many, many more requirements. Most banks did dramatically cut back on their allocations for construction loans. There are lots of empty, half-built new houses sitting around bleeding bank capital.

    Another problem is that Jane started construction before the mortgage loan closed. That raises the possibility that the contractor’s lien for payment becomes a priority before the mortgage lien. Most lenders have a big problem with construction starting before the loan is closed.

    Lastly, the loan is for a second home, not Jane’s primary home. This leads to different treatment and underwriting standards. The vacation home market was hit very hard by the housing bubble.

    There are disagreements over whether there is a credit crisis. Certainly, banks have raised their credit standards. But many banks are touting the volume of loans they have made over the last two years. The volume of lending is clearly down, but it seems to be a combination of decreased demand, decreased values and decreased loan availability.

    Sorry, but I don’t find Jane’s story compelling and it’s not a useful example to condemn the banks.

  6. James A. Boyd
    James A. Boyd says:

    Hi Charles,

    You are asking me to extend my limited knowledge to the breaking point.  Having done that, I have to admit that you have a valid point.  Yes, the TARP program does require repayment from raising capital.  Loans are a part of total assets, and the capital ratio is basically a percentage of total assets.  So, a loan-to-capital ratio could be much the same as a loan-to-deposit ratio, although  the latter ratio carries much more significance becasue it represents a greater liquidity risk and thus needs to be monitored more closely.  Loans are not generally quickly collectible while deposits can be withdrawn very fast.  A bank can have excellent capital ratios and still get nailed by huge liquidity problems. 

    In thinking about a response to your question, I did learn that, as obscure as it may be, the regulators are giving the loan-to-capital ratio increased attention as a reaction to th curent economic environment.  I think this may speak to the issue of TARP restrictions on leverage that you mentioned. 

    I try not to be a conspiracy theorist, so I discount any linkage between the executives sale of stock options and repayment of TARP funds.  I really suspect that it is more closely linked to a desire to be out from under Govt. control.

    Finally, Doug Cornelius makes some very valid points about the transaction itself, which was the subject of your post.  Even in my business (wealth manegement product development and sales) the regulatory burden – and directly linked transactional response – has become almost opressive.  Perhaps both parts have an unfortunately good basis in reality.  Two of the biggest growth areas for money laundering, funding of terrorist activities, fraud and other illicit acts are trust accounts and – you guessed it – mortgages.

    Make it a great day!


  7. James A. Boyd
    James A. Boyd says:

    PS Charles,

    While you are right on your comparison of capital rations, in defense of my questioning whether we have the full story, is the fact that bank loans, mortgage or other, are made from customer deposits and not from bank capital.  Capital may be diluted by having to allocate some of it to a loan loss reserve, but not to make direct loans.  Thus, under normal circumstances, not making a loan to Jane would not help/influence Wells TARP repayment.


  8. Charlie (Green)
    Charlie (Green) says:

    Doug and Jim,

    Thanks much for your thoughtful and careful responses.  Good data from both of you, and I echo Doug’s wish that we heard from more involved in the situation: particularly Wells-Fargo.  Hey, anyone home in Duluth’s office up there?  Oh wait it’s 30 below zero, I guess we can forgive their taking a day off from reading TrustMatters.

    I hate being on the side of conspiracy theorists myself, but I confess I’m a little quicker than Jim to suspect a connection between TARP repayments and executive stock options.  In fact, a corporate ethicist I spoke to recently (and will be doing an interview with in future) suggests that what he’s seeing is the financial industry in general beginning to not even bother justifying monetary behavior, and to feel that greed is simply the nature of the Wall Street beast.  

    Doug, I respect the careful deliberation to these dialogues, but I have to confess you raised my eyebrows when you said: "There are disagreements over whether there is a credit crisis."  Really?  Do a search on "credit crisis" and you’ll find quite a  lot of mentions of it, but I haven’t run across any (admittedly in a casual look) who suggest there isn’t one, or that it’s a figment of imagination.  I’m sure there are definitions, etc., but really…

    Anyway–thanks greatly to you both for educating me and a bunch of others about the ins and outs. 


    I don’t like being on the side of the conspira

  9. Stewart Hirsch
    Stewart Hirsch says:

    I’d like to focus on the facts of this transaction, and I understand we don’t know them all.  I also understand the red flags, and the need for more questions to be asked, but some of this just doesn’ t make sense. 

    Just using one example – the $30,000 deposit.

    1.  Deposited $30,000 in a new business account at the request of the bank, by Jane’s sister on day one.

    2.  2 weeks later, loan application filed.

    3.  Some time later, closed the personal account and transferred the $30,000 (see #1) to a personal account.

    4.  2 months later, gets asked about the $30,000.

    Let’s say moving the cash, which was in the same bank in another account, is a red flag, as Doug says.  Why is the question about the cash movement asked at least 8 weeks after the loan application was made?

    This along with the issue of being told of another delay just before boarding a plane, and 10 days after being told it’s all set, can’t be just about regulations.   The regulations were there all along.  It also doesn’t make it a conspiracy. 

    Maybe there’s a simple explanation – it could be as simple as an issue is about communication.   About telling the customer what the process entails up front.  Asking the questions that have to be asked early on, explaining the red flags when they come up and not after being told all is well.   

    So, maybe this was just a comedy of errors and failures in communication that isn’t funny. 





  10. James A. Boyd
    James A. Boyd says:

    Stewart, do you realize how insightful you are?  In a prior life I tried (emphasis on tried) to teach trust-based selling to the clent contact staff at a few of these behemoth banks.  Accordingly, I can say – without fear of contridiction – that they are often bungling, very bureaucratic and very poor communicators (internally and externally).  To suggest that they should keep the prospective client informed of possible red flags, the reason for the endless probing questions and possible transaction delays would be an afront to their ego-centric nature.  While they might deny it, the trusting and being trusted concept of  a human relationship, and its collary of collaboration,  just does not sink in.

    Regards, Jim.

  11. Doug Cornelius
    Doug Cornelius says:

    Stewart –

    This transaction was FUBAR. From the sounds of it, on both sides. I think Jane was in over her head and that the inital contacts at the bank were also. 

    Charlie –

    I should have been clear that I was talking about residential. There is a credit crisis, but not for residential mortgage loans for borrowers with good credit. The problem is that banks want creditiworthiness. So if they got a loan two years ago with bad credit, they now have a problem refinancing. Plus the value of most homes have retreated back to pre-2006 values.

    Lots of people are in a bind because they have bad credit and bad assets. Banks just are not willing to lend to the same people and assets they were two years ago.  In hindsight, lots of the loan should not have been made in the first place.

    A friend jsut bought her first house, with a quick, trouble free mortgage at less than 5%.

    Beyond residential mortgage, there are lots more financing problems with commercial loans and business loans. But that is another discussion.

    Repayment of TARP funds and executive compensation? I do find that more questionable.  I just don’t think Jane’s story has anything to do with that.

  12. Charlie (Green)
    Charlie (Green) says:

    Good stuff, people, I for one am learning a lot here, thank you. Let me push it one step further.  I think there are three points I’m trying to make.  Two of them are stronger than the third, and I have you guys to thank for all three.

    1. TARP threatened exec compensation.  There’s no question that TARP imposed severe restrictions on executive compensation.  I’ll cite just one example, a quote from Crowe Horwath, a major accountancy, here: 

    "The American Recovery and Reinvestment Act of 2009 (ARRA), signed into law on Feb. 17, 2009, imposes sweeping changes to the executive compensation rules for all recipients of any Troubled Asset Relief Program (TARP) financial assistance, including both past and future recipients under the Capital Purchase Program (CPP)."

    2. Executives wanted to get out of TARP fast because it threatened compensation.  Here I can’t say it’s a "fact" in the same way as #1, but I will cite Slate Magazine’s Daniel Gross at who says, "From the outset, healthy banks were eager to get out from under the TARP because they wanted to avoid discussions about appropriate levels of executive compensation…as much as anything else, the threat of the government having limiting bankers’ compensation spurred the banks to get their houses in order."

    For more, read a comprehensive article in Bank Director magazine, at .  It’s clear compensation committees are feeling very squeezed by TARP.

    3. Reducing loans outstanding helps banks get out of TARP.  This one is probably my weakest link in the argument, as Jim and Doug have suggested.  It seems to me directionally right, though you two have raised good questions about the tightness of the link.

    The only data I have found to directly support my inference is an article in HousingWire, a site focused on the mortgage industry.  The headline is pretty clear: Home Purchase Loans Down Among Top TARP Recipients.  More at .

    Casual lurkers who know something?  Log in.

    Thanks for the education.



  13. Sister of Jane
    Sister of Jane says:

    Hello –  I am Jane’s sister.   If Jane  (especially Jane since I decided go to a different route early on) and I hadn’t been put through it, I wouldn’t have believed it.  FUBAR is right.  Like one of those dreams that makes no sense at all.
    One of the posters said Jane was in over her head.  What?  Why would we have been in over our heads?  We went to a bank asking for a loan for a modest addition to our cabin.  Isn’t that what people do?  We were told our loan was possible, but then WF could never give a reason for the delay – kept saying the underwriter (Wizard of Oz?) now needed this, and that, ad nauseum.
    There was no logic to telling Jane she was an ideal customer, giving us permission to start early because the loan was sure to go through ("not a problem"), ignoring us when we asked for explanations, sloppily asking for the same thing again and again over e-mail containing private financial information.  We’d been giving them the benefit of the doubt because of "the current economic condition", but when the 11th hour came before the closing, it became clear that they were also very incompetent.  So Jane said "uncle."   On the books I guess it looks as if she decided not to go through with it.
    My theory is that Jane is not their "ideal customer" because she is very solvent and might have tried to pay off the loan quickly.  She doesn’t carry enough personal debt.   They wouldn’t have been able to extract years of interest.
    The most confounding thing to me was that there was no follow-up by the Senior Relationship Manager at WF, the guy who stepped in at some point to make it happen.  Nothing, nada, no phone call, e-mail. With a title like that, you’d think there’d at least be some closure.  Call it what you will – common courtesy, customer service, manners your mother taught you – but there was none of it.   Three months later I’m still appalled by that but it occurs to me that this wasn’t a big deal to them; it must be standard operating procedure.  What a house of cards we live in.
    Jane’s sister

  14. The Reality Fairy
    The Reality Fairy says:

    We went to a bank asking for $250,000 a loan for a modest addition to our <strike>cabin</strike> second home. 


    Isn’t that what people do?

    Over here in RealityLand where unemployment is in double digits, bankruptcy rates are doubling, and foreclosure rates are setting new records…No.

    Life sure looks different over there in the Entitlement Bubble.



  15. James A. Boyd
    James A. Boyd says:

    Wow, this is getting serious, perhaps more so than I expected.

    Reality Fairy – When you grow up or live in New York, and surounding environs, where the median home price is two to fours times the national average, $250K would equate to a modest addition.  That is Jane’s and her sister’s perception, their reality.  It is not a reason to scold/chide them   I am truly sorry if you are on the short end of the stick in this economy but, when I was in law school,  I recall my legal ethics professor telling us that a compassionate soul will win more juries – and adversaries – than a harsh judgmental heart.  So, give the ladies a break on this one.

    Jane’s Sister – There are a number of issues here that likely have nothing to do with TARP, as Charlie may suggest.  I love the Wizzard of OZ analogy; you may be closer to the truth than you realize.  However, I doubt Jane’s credit and repayment possibilites had much to do with the snafu.  Most all bank sell their mortgages in the secorndary market as soon as they are written,.  The buyer takes them on an aggregate basis with litle time or inclination to drill down into the characteristics of each individual borrower.  Simply put, Wells would have little or no interest in how fast Jane might pay-off the debt; not their issue anymore if they sell the loan.  Also, we forget that Wells got big by buying local banking operations – as was the case with the MN operation.  When you buy, you take what the seller has to offer, including staff.  Trying to meld the cultures of acquirer and seller takes time and is not always successful.  Just maybe, Wells got (bought) a bunch of folks that are not client focused/sensitive in Duluth.  I can tell you from personal experience (having taken over a number of accounts from Wells locations around the country), not everyone in the organization is at the top of their game.  But, we all have work to do in improving relationships.


    Charlie – I agree that TARP threatens exec. compensation.  The full impact of that reality is a large unknown.  It has not been fully tested in the crucible of fire yet. I believe the almost panic run to repay TARP loans is evidence of the great desire of TARP participating banks to avoid that test of fire.   However, I would not discount the fear of many bankers that attaches to the prospect of TARP control over their institution.  Some if this "fear" is a genuine adversi0n to more government regulation, And, some of it has to do with not wanting any restrictions on their share of the pie.  Unfortunately, the so-called "free market" also includes "free to be greedy".  To me the larger issue is allowing big banks to Privatize profits for the benefit of senior management and shareholders while Socializing the losses through the taxpayers.  Forgive me for starting to get political.

    Finally, I still do not see any causal link between denying loans and TARP repayment.  I maybe missing someting obvious – or subtle – but it has not registered with me yet.

    Thanks for listening.






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