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Let’s go back to the 1.50 carat round diamond I was using as an example. At SI1 clarity, a G color diamond would have a loan value of $5700 (3/27/15 price list, down a little from the last list). A 2 grade drop in the color grade to “I” decreases the loan value to $4560 and another 2 grade drop in color to “K” decreases the loan value to $3300. The 4 grade drop in color reduces the amount I can lend by $2400.

Color grading is the most difficult part of the appraisal process in my business. That is because I must almost always color grade the diamond in the mounting and the mounting can impart color to the stoneor otherwise mask it. The proper procedure and the one followed in the gemological laboratories is to have the diamond loose, table down in a grading tray under a grading lamp with a neutral, white background where it can be compared to master color grading diamonds. But in the real world of doing business by lending money on the value of mounted diamonds, I rarely have that opportunity. One of the risks of my business is getting the color grade wrong, usually by thinking it is better than it is, and then having more money in it that the dealers want to pay for the real color.

Dealers often tell me to appraise collateral at 2 color grades lower than it looks to me. They tell me this because if the collateral defaults, then they can buy it at a lower price. They are thinking like buyers and sellers and not like lenders. In our example above, if I really think the 1.50 carat round SI1 clarity diamond is a “G” color but follow their advice and assign a loan value to it as if it were an “I” color, then I lend them $1140 less ($5700 – $4560 = $1140). In doing so, I am less of a solution to their financial need and I forego the interest income that could be earned on that $1140. Only about 15% of my customers will abandon their loans and necessitate a sale of the collateral. So I choose not decrease the loan amounts on the 85% of my customers who are going to pay their loans and to call the color grade as best as I can determine it and lend the money that grade deserves.

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