Category Archives: lending

Mortgage software worth the expense, eventually

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In 2006, Northwoods Bank of Minnesota purchased Mortgagebot, a web-based mortgage origination software, to streamline its documentation process and make applications available to customers on line. Roger Stewart, president of the Park Rapids, Minn.-based bank, took some time to share with me about mortgage software at the Independent Community Bankers of Minnesota’s TechXpo in Minneapolis on April 23.

Initially the $110 million bank obtained the software to compete with larger banks. “It’s not so much that Wells Fargo has a large physical presence in our area as much as what customers expect. Customers can easily apply for a mortgage on Wells Fargo’s website; to compete we wanted to offer the same,” Stewart said.

The bank also purchased the technology for its compliance benefits. The program structures the loan documentation process so that bank employees follow all the steps required by mortgage regulation.

Stewart estimates that it took about six years for the bank to gain efficiency from the product. “After a year, I would have said the purchase wasn’t worth it, but now I think we have seen an efficiency gain from it,” Stewart said.

It took time for the bank to see an efficiency because customers were slow to go online to make application. Now, about 40 percent of the bank’s mortgage applications come online. “But we still end up having to talk with customers for about 10 percent of the applications, because they have filled out the application incorrectly,” Stewart said.

 

Using SBLF to exit TARP; cookie anyone?

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The Special Inspector General for the U.S. Treasury’s Troubled Asset Relief Program has reported that 137 banks out of the 332 banks participating in the Treasury’s Small Business Lending Fund used more than half of the funds disbursed by the program to exit from TARP.

This announcement will surprise you as much as the discovery that your child has eaten the cookies you set out on the counter to cool.

Launched in September 2010, SBLF was created by Congress for a specific purpose: to boost small-business lending. But Congress left the goods out on the counter, it allowed banks in TARP to access SBLF and it made no law prohibiting the use of the funds to repay TARP. It had communicated its intent for SBLF, without making a law.

In fact, Congress created an incentive for TARP banks to use SBLF in this fashion. “Several members of Congress voiced concerns that the program could serve as a vehicle for TARP recipients to refinance into SBLF under more favorable terms… TARP banks paying a dividend rate of 5 percent that transferred into the SBLF program had the potential to lower their dividend rate to 1 percent if they increased lending,” the Inspector General reported. “In addition, the SBLF dividend is non-cumulative, meaning that participants have no obligation to make quarterly payments as scheduled or catch up on missed payments, compared to TARP dividends, which generally are cumulative.”

In the middle of last year, the U.S. Treasury also notified small banks that it would begin to auctioning pools of stock from banks participating in TARP in the fall. The 200 banks that received the notice made up $2 billion of the Treasury’s then $11 billion TARP investment. Treasury cannot require banks to repurchase their own investments but Treasury can sell its TARP stock without the bank’s consent. And, if the bank didn’t have the capital to buy its securities back, its stock would be sold to the highest bidder. Is it any wonder the banks used SBLF to exit TARP? I had access to the cookies and I didn’t like the idea of others eating them, so I took one.

More than a majority of TARP community banks (320 out of 552) applied for SBLF funds. Banks selected for SBLF were required by Treasury to repay TARP in full, and Treasury allowed banks use SBLF funds to do so.

There is no doubt that the banks which used SBLF to exit TARP did not use the program in a way consistent with its purpose. Out the 137 former TARP banks in SBLF, over 96 percent did not significantly increase small business lending. They used $2.1 billion of the $2.7 billion they received to repay TARP.

There also was a significant difference in lending depending on whether the bank received only enough SBLF funds to repay TARP or received additional funds. TARP banks that received only enough funds to repay TARP have lent out significantly less than they received in SBLF funds – increasing lending by only 25 cents for each $1 in SBLF funds. TARP banks that received additional SBLF money beyond the outstanding TARP balance have increased lending by $1.67 for every $1 in SBLF funds. Non-TARP banks increased lending by more than three times that amount – $3.45 for each $1 in SBLF funds.

Even with such loose restrictions on the use of SBLF funds, Treasury only managed to invest $4 billion of the $30 billion available. And of that $4 billion, about 66 percent went to banks exiting TARP. Congress and President Obama successfully created a program which, in the majority of cases, only proved useful for those banks which had already been bailed out.

Perhaps now Congress will learn that in the arena of government handouts and chocolate chip cookies, creating something with the right intentions does not guarantee the intended result. I’m not getting my hopes up.

 

Banks, taxpayers pained with latest Administration move

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The Obama administration is pulling a fast one on the taxpayers of this nation. Two days ago, the president authorized a package of relief measures for drought-stricken states. Included is an effort by the National Credit Union Administration to increase the number of credit unions eligible for status as low income institutions. One of the benefits of being a low income credit union is the ability to make an unlimited amount of business loans.

The NCUA says it mailed notices to 1,003 credit unions, informing them they are eligible for the low income designation.

Given the battle in Congress over the credit union business lending cap, this is an amazing step for the Administration to be taking. For many months, Congress has been debating legislation which would increase the current business lending cap. Because there is no consensus among the members of Congress that this is a good idea, the legislation has not moved forward.

But now the Administration lifts the cap for 1,003 credit unions. The NCUA says the move will free up $250 million to $500 million in new business lending. This is utter nonsense. There is a vast network of community banks across the country ready to make loans to small businesses. The issue is not lack of credit, but lack of demand.

As a practical matter, if the removal of the business lending cap on those credit unions does anything, it will free those credit unions to compete for the existing pool of small business borrowers in each market. Any business they win simply means loans moving from tax-paying banks to tax-exempt credit unions. In other words, no additional credit will flow, but the credit that does flow will generate less tax revenue for the government.

The NCUA has long been much more of a cheerleader for the credit unions than a regulator, and this is just one more example. Designating more credit unions as low income institutions will help no one and it will hurt taxpayers. It will also hurt community banks that have to compete with these credit unions.

Government pressure continues to mount at community banks, with an increasing regulatory burden, increasing capital requirements, and now more help for competing institutions. These policies will only drive more tax-paying banks out of business, while they will encourage tax-exempt credit unions to flourish.

Industry united in opposition to credit unions

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An area where the American Bankers Association and the Independent Community Bankers of America work well together is in opposition to increased power for the credit union industry. The associations issued a joint letter to each member of the U.S. Senate this morning articulating their opposition to S. 509, legislation that would raised the business lending cap for credit unions.

Credit unions claim that banks aren’t making sufficient loans to businesses and they are telling congress that if they give them the authority, they will pick up the slack. In fact, however, banks are making small business loans commensurate with demand, and the vast majority of credit unions haven’t come anywhere close to bumping up against the current cap. In other words, if they really want to make more business loans, most credit unions can do so right now without any change in the law.

Bankers fear that some members of the House and Senate may decide that if they approve the banking industry-supported legislation to improve the exam process, the lawmakers will feel compelled to “do something for the credit unions, too.” The bankers are making it clear they will not accept S. 509 in exchange for passage of H.R. 3461, the Financial Institutions Examination Fairness and Reform Act.

Following is the text of the joint letter:

Dear Senator:

The American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA) are writing to express our strong and emphatic opposition to S. 509, a bill that would raise the credit union member business lending cap. In short, this proposal would permit large, untaxed credit unions to use their tax subsidy to compete aggressively with taxpaying community banks and severely harm the ability of those community banks to serve their local communities.

The ABA and ICBA stand united in vigorously opposing movement of this controversial bill in any form, either independently or as an amendment to any legislative package, including the “JOBS” bill.

ICBA and ABA’s highest shared priority is to advocate for legislation that will promote the economic recovery on Main Street – the small towns, suburbs, and rural communities served by community banks. There is a direct link between the regulatory environment for banks and the vitality of the economy. There are a number of bills that would serve to promote community banks’ ability to serve this important function.

S. 509, however, works in the opposite direction. S. 509 more than doubles the current, Congressionally imposed limits on credit union business lending authority, essentially permitting large, complex credit unions to use their tax subsidies to cherry-pick loans that community banks willingly make.

Despite credit unions’ claims that this legislation would help small credit unions, nothing could be further from the truth. This bill would starve community banks of the loans they use to build revenue to support greater lending efforts locally, and would contribute to the pressures that are forcing many community banks to re-examine their ability to remain independently viable. This would be a terrible result, not just for community banks but for the thousands of local communities they serve.

Community based banks are prolific small business lenders and have stood by their customers throughout these difficult economic times. They are helping to expand small business credit as the recovery strengthens and demand returns and they pay federal, state, and local taxes to support their communities. ABA and ICBA support all viable and legitimate proposals to expand small business credit. However, S. 509 would not expand the pool of credit available to small business borrowers. Rather, it would displace lending by tax-paying banks, at a significant cost to taxpayers and to the detriment of banks and the communities they serve.

Do not let this new breed of aggressive credit unions hijack positive job-creation legislative efforts to advance their own aggressive and highly controversial agenda.

Again, ICBA and ABA urge you to oppose the inclusion of S. 509 or any related provisions in the forthcoming capital formation legislative package and to oppose any such amendments as the package advances.

Thank you for your consideration.

The letter is signed by ABA President/CEO Frank Keating, and ICBA President/CEO Camden Fine.

Small banks key to small business lending, Neb. banker notes

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Next week, fourth-generation banker Jeff Gerhart of Bank of Newman Grove, Neb., will become chairman of the Independent Community Bankers of America. This October, fourth-generation banker Matthew Williams of the Gothenburg State Bank, Gothenburg, Neb., is slated to become chairman of the American Bankers Association. Williams attended the ABA National Conference for Community Bankers in California last month, where I had a chance to visit with him.

I asked him if he has seen anything surprising as he travels around the country visiting with bankers on behalf of ABA. He said:

The one thing that I expected and I have confirmed is that bankers are great people. They care about their communities and work hard for their communities, whether they are in Florida, Texas, Nebraska, California.

That said, right now we have various challenges in different geographical areas of our country. We happen to be an ag bank in the middle of Nebraska. Agriculture has been very strong. Unemployment in the state of Nebraska is slightly below 5 percent. We are not having the economic woes of some other geographic areas. There are other areas of our country that are still struggling very desperately.

One of the things that I believe is that banks, in particular community banks, need to be part of the solution, to helping us out of these economic issues. I have the honor of serving on the FDIC Acting Chairman Gruenberg’s advisory committee and one of the comments he made last October at our convention really hit home: He said the community banks hold slightly less than 10 percent of the total banking assets,  in our country. Yet those same community banks make more than 40 percent of the loans to small business that create the majority of the jobs in our country. So there is a unique role for banks in our country.

And one of the things that we have to recognize  when you talk about large and small is many of us as community banks do not have the size and the sophistication to handle the international large kind of things that our bigger members have the ability to do. We need that in this diverse, global economy.

With that, I continue to jump up and down and applaud bankers who are good people, working hard for their community, making things happen. And we will survive these times. I have no doubt about it.

Look for much more of this interview in an upcoming edition of NorthWestern Financial Review magazine.

Capital demands mean less lending at smaller banks

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The impact of the recent regulatory focus on capital is evident in the year-end numbers released by the FDIC yesterday: lending is down, particularly among smaller banks.

The lending trend among banks with fewer than $100 million in assets speaks volumes. Here is the situation in six Upper Midwest states:

Illinois – At year-end 2009, the 273 smaller banks (less than $100 million in assets) had total loans of $12.4 billion and a loan-to-deposit ratio of 69.9 percent. At year-end 2011, total loans at the state’s 243 smaller banks were $11.8 billion and the loan-to-deposit ratio was 63.0 percent.

Iowa – At year-end 2009, the 180 smaller banks had total loans of $6.3 billion and a loan-to-deposit ratio of 75.4 percent. At year-end 2011, total loans at the state’s 160 smaller banks were $5.4 billion and the loan-to-deposit ratio was 69.3 percent.

Minnesota – At year-end 2009, the 241 smaller banks had total loans at year-end of $7.8 billion and a loan-to-deposit ratio of 78.6 percent. At year-end 2011, total loans at the state’s 220 smaller banks were $6.8 billion and the loan-to-deposit ratio was 70.7 percent.

Nebraska – At year-end 2009, the 152 smaller banks had total loans of $5.5 billion and a loan-to-deposit ratio of 79.3 percent. At year-end 2011, total loans at the state’s 127 smaller banks were $3.7 billion and the loan-to-deposit ratio was 75.1 percent.

North Dakota – At year-end 2009, the 58 smaller banks had total loans of $1.8 billion and a loan-to-deposit ratio of 71.2 percent. At year-end 2011, total loans at the state’s 48 smaller banks were $1.4 billion and the loan-to-deposit ratio was 62.6 percent.

South Dakota – At year-end 2009, the 50 smaller banks had total loans of $1.5 billion and a loan-to-deposit ratio of 76.1 percent. At year-end 2011, total loans at the state’s 44 smaller banks was $1.2 billion and the loan-to-deposit ratio was 70.1 percent.

It is important to note that the statistics show total lending in Illinois, Nebraska, North Dakota and South Dakota was up over the last three years since larger banks experienced loan growth. In Iowa, the total lending level was virtually unchanged.

It should not come as a surprise that regulatory demands for increased capital should hurt lending at smaller banks more than at larger banks. At larger banks, particularly those that have access to capital markets, raising additional capital is easier than it is at smaller banks. At many smaller banks, the only way to raise the capital level is the shrink the balance sheet, which means less lending.

Furthermore, deposits are way up from 2009, making the current loan-to-deposit ratios look particularly weak.

Critics are quick to say that smaller banks don’t want to lend but I don’t think that is it at all. Banks make their money by lending, so it is hard to argue they don’t want to lend. By demanding more capital, regulators can say they are making smaller banks safer, but at the same time, they are making them less useful. And that’s a shame for everyone.

Starbucks and small business lending

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This very interesting column ran in the New York Times earlier this week. Howard Schultz, the chairman and CEO of Starbucks, is trying to make credit available to small businesses. Starbucks will encourage customers to donate to a fund that will be funneled to Community Development Financial Institutions, which will, in turn, make loans. The Starbucks Foundation is kicking off the effort with a $5 million donation.

Schultz comments that banks either can’t or won’t make loans. Undoubtedly, some of that is true, depending on where you are in the country. I do wonder, however, what a CDFI can do that a community bank can’t do? In the Twin Cities, University Bank is a CDFI and I am fairly confident they are making all the loans they can. I don’t believe the problem is a lack of access to capital.

While a lack of access to capital certainly makes it harder for the small business owner, it doesn’t stop them in their tracks. Lots of small business owners use credit cards to get access to smaller amounts of cash if they really need it. Access to that kind of credit remains wide open.

If businesses aren’t growing, I think it is probably more the result of uncertainty. A business owner has a very difficult time planning one or two years into the future at this time. We don’t know what the health care cost burden is going to be, what the tax situation is going to be, or what new programs might be launched that would make it smarter to hire in six months rather than right now. Timing is everything in business. Entrepreneurs take risks, but not uncalculated risks. They need to be able to see 12 or 24 months into the future with some clarity. If you don’t know whether your journey is going to be uphill or on level ground, most hikers will pack a light load just to be sure. Employers aren’t hiring because they just aren’t sure.

I applaud Mr. Schultz. I am impressed by people who identify problems and then do something to solve it. Perhaps his program will make a difference. It certainly will raise awareness. But it will be interesting to see in a year or so how many businesses have actually tapped into this credit and what they have done with it.

AG focus, ECOA’s coming mandatory race and gender data collection rules, seem problematic

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This article published in Investor’s Business Daily yesterday caught my attention. It would be interesting to know to what extent the Justice Department really is focusing on banks to obtain social goals. I remember writing about Attorney General Janet Reno and the Justice Department under her leadership. I particularly remember writing about the trouble the Justice Department caused for small banks operating near Indian Reservations. The fact that current AG Eric Holder was a lieutenant for Reno does not give me a lot of comfort.

The timing of this article is very interesting given than in about a week and a half, the new Consumer Financial Protection Bureau will begin its jurisdiction over several banking rules. Starting July 21, the CFPB will be responsible for enforcing the Equal Credit Opportunity Act. The CFPB is required to take the ECOA’s voluntary race and gender data collection requirements and make them mandatory. It will have to write rules for this so it will be a while before the mandatory practices are in place, but they are coming. Lenders will be required to collect from loan applicants gender and ethnicity information. Although prohibited from using this information for underwriting, lenders will be required to present such information annually to the CFPB. Lenders will have to collect the data regardless of whether the loan application is made in person, over the phone or via the internet.

Mix a zealous AG with this kind of data collection and you have a recipe for disaster, as far as I can see. No matter what the data says, I am certain it will be positioned in such as way as to say lenders are not doing enough, that they are discriminating.