BofA Demands Early Payment on Small Business Loans
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UPDATED: Jan 3, 2012
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In an effort to raise capital and reduce risks, Bank of America has sent out notices to many small business owners requesting their personal loans be paid off immediately. The letters announce the lender’s intention to sever the business owner’s lines of credit, and require the balance for the loans to be made in full. If borrowers are unable to pay the personal loan off in full, BofA is allowing them to adhere to new repayment programs—but these new repayment plans carry much higher interest rates than the original lines of credit were first agreed to.
The Los Angeles Times reported on one small business owner named Babak Zahabizadeh who had an outstanding balance of $96,000. The letter he received called for full repayment by January 25, 2012. Zahabizadeh was offered an alternative of a two year repayment program carrying 12 percent interest. His monthly payments would come out to be $4,500 per month—nearly 10 times his current payment on the personal loan.
To get through this tough economic trial, Zahabizadeh has already had to let go of 120 employees, bringing his numbers from 200 to 80.
“My final word was that I can double my payment—but not triple or quadruple it,” Zahabizadeh told the LA Times. “I told them if they apply too much pressure they’re going to push me into bankruptcy.”
BofA claims a “very small percentage” of personal loan holders are being affected by this severing of credit, but they have refused to release exact numbers. The only hint given by the bank is that the numbers are not in the hundreds of thousands.
“These changes were explained in letters to customers, and they were necessary for Bank of America to continue prudent lending to viable businesses across the U.S.,” said BofA spokesman Jefferson George.
Paul Miller, a bank analyst for FBR Capital Markets, explained what he thought was behind BofA’s reasoning. “Bank of America is under great pressure, especially with another round of [Federal Reserve] bank stress tests coming up.” He said that restricting credit lines “is a way to show the regulators they are serious about addressing risks.