Character, the Good, the Bad and the Ugly

Character is not credit criteria that can be normally quantified, but it is important to lending. I used to tell my students, “Your borrowers can’t pay you if they are in jail. Character matters!”

How can a lender possibly come to understand someone’s character? The obvious way is by simply getting to know him or her better. We all know what it is like when we get a gut feeling that someone is lying to us or up to something suspicious. A lender should be a “relationship manager,” and the lender should have an ongoing relationship with the borrower, so he or she has a good sense of the borrower’s character or moral compass.

Even if you have faith in the borrower’s character, the lender or underwriter should make use of public resources to discern as much about the borrower as possible. Younger generations are inclined to immediately do a Google search for the borrower’s name and check for any social media profiles. This is not a bad idea. This is a quick way to see how someone is presenting themselves to the public. If those searches turned up something questionable or objectionable, would you want to lend money to that person?

A public Internet search is only the tip of the iceberg. All lenders are familiar with pulling credit reports on individuals, and this may give you better insight into what type of customer you have. While credit scores are relevant, it is important to bear in mind, they tend to reflect only personal obligations and can easily be affected by close family members. The individual is likely not the sole source of repayment for a commercial loan. And, credit reports are limited in what they can tell you. For these reasons, credit scores are still relevant in commercial lending but to a lesser extent than when used in consumer lending. The report will probably not reflect commercial debt. Also, it will not indicate if the borrower has any criminal history.

A background check can be utilized to search for criminal records and even civil litigation. There are a wide variety of companies that provide background checks, and they range greatly in price and quality. Most resources tend to focus on verifying public records and a review of criminal activity; whereas, systems that check for civil litigation are harder to come by. The federal government has a repository for federal court activity at but this will not capture cases filed in State courts.

The extent to which I have suggested investigating a customer’s background may seem invasive, but remember, commercial lending typically involves the transfer of substantially more money than a consumer lending transaction. If a $20,000 loan does not get repaid because a customer is convicted or suffers from a lawsuit, your institution will likely persist tomorrow much as it did today. If your institution loses a $2,000,000 loan because of a borrower’s criminal conviction or a civil judgment, now your executive management may be concerned with capital ratios and face increased regulatory scrutiny. In this respect, you should not feel as though you are invading privacy, because your institution simply cannot afford to suffer a large loss of funds due to character flaws.

My advice is always do a character check for all significantly large loans and cast a big net. Pull a credit report, do some internet searches, find an affordable yet effective way to check into criminal records, search for the customer’s name at, and try to check any search engines provided by your local court system. And if you do find adverse information about your customer, don’t immediately assume your customer is a terrible person to do business with. Present your findings to the borrower in a professional manner, and listen to what they have to say. Your customer may have a reasonable explanation for your findings, and if they do, then it is your responsibility to check if there is corroborating evidence supporting their explanation. --Trevor Plett