How should a lender explain its own COVID-19 challenges to clients?

People in the real estate game are known for their ability to put a sunny spin on anything – the market’s not crashing; it’s just the bottom of the cycle! – but COVID-19 shackled lenders in a way that should have wiped the smile from most of their faces. It’s hard to tell clients not to worry when their lender can’t lend.

That was the state RCN Capital found itself in shortly after COVID-19 arrived. Unsure of how the pandemic would ultimately impact the company’s business, real estate sales, and the secondary market, RCN effectively shut down its lending activities.

“We were really trying to understand how all of those things would combine in a way that would impact our industry and the housing market overall,” says Justin Parker, RCN’s senior vice president of treasury and capital markets. “We were doing a very minimal amount of closings.”

While RCN was putting in work determining new price points for their loans in the secondary market, Parker says the company had another major responsibility: informing their clients about what was happening at the company and about how COVID-19 would alter some of their offerings –less leverage, slightly higher prices, more focus on a customer’s credit quality – going forward.

“We had to develop an understanding with them that said, ‘Look, January and February are a thing of the past right now. We’re going to try to get back to those levels, but the reality is we can’t give out 90 percent loans like we were in January and February,’” Parker says.

Experienced real estate investors familiar with the private lending field RCN operates in had little trouble wrapping their heads around the new reality. Newer clients and those with smaller portfolios, however, required more time and education. For RCN to be there for them tomorrow, they’d have to make some adjustments today, and those adjustments might make borrowing slightly less comfortable for their clients.

Because some borrowers expect very little in terms of honesty from their lenders, Parker says there are some who won’t believe a financial institution when it says it’s experiencing distress of its own.

“Some people will say ‘I don’t know if I believe you,’ and then they have to go through the painstaking process of reaching out to people and maybe taking it to another lender because they don’t believe what we said,” Parker says.

But losing a client because they rejected an honest explanation is a risk worth taking. It’s a far better prospect than a company covering up its struggles and then not being able to provide assistance when their clients need it. During COVID-19, Parker says some lenders have even been “pretending to lend” so they can continue generating leads. 

“We can’t build relationships with people if they’re based on lies,” he says. “People aren’t choosing solely based on terms. They want execution. They want that relationship. They want to be able to build their business with a partner, not a lender.”

That here’s-the-deal approach has paid off for RCN. Parker says the company’s pipeline is already back to where it was pre-COVID-19.