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Questions I've fielded recently about the banking industry

Mortgage and Lending with Crescent Bank & Trust

1)  How the heck did banks (especially community banks) get into such a mess in the first place?

Doesn't every bank have rules in place to limit excessive lending concentration to a particular industry?

•·Was it all about paying big bonuses to the ivory tower folks & top producers, or was it something else?

Clark's opinion: 2007 - 2009 marked a financial "perfect storm" that combined rising unemployment, a higher-than-normal percentage of subprime mortgage defaults, & a slowing economy. Should banks have slowed lending & reined in industry concentration much earlier than they did? Hindsight being 20 / 20, the answer is yes, but there's more to the story.  The "widget" in banks is money.  If your widget company had for more than a decade been unfailingly able to sell more widgets than you could get your hands on, would you (unless - perhaps - you had found yourself with a widget industry monopoly) have ever willingly considered either halting or even slowing the sale of your widgets?  Oh, I'm smarter than that, you say. Are you jerkin' my chain? 

But . . . Wait!  There's more . . . one more strong weather event stalled over the rising hot air from Washington, DC & added even more "punch" to the perfect economic storm of 2007 - 2009. Government interference embodied and mandated by the Community Reinvestment Act legislates that lenders set aside the basic principle of lending money only to those applicants who are clearly able to repay. CRA operates under the Pollyanna-ish premise that all Amercians have the right to own their own home.  That stretches our Founding Fathers' ideals of "Life, Liberty, and the Pursuit of Happiness" to the breaking point, along the same lines as "Universal Health Care".  Those Americans with ability and work ethic can accomplish anything. Our Bill of Rights is a remarkable and far-sighted document of freedom, yet its wise, monarchy-shy, and deep-thinking authors were entirely silent on the right to "universal" education, "universal" healthcare, & "universal" home ownership.

Interestingly, in a January 20, 2010 speech to the CMBS (Commercial Mortgage Backed Securities) industry, FDIC Chairman Sheila Bair stated the following:

[Excerpt from Chairman Bair's 1/20/2010 CMBS speech presented in its entirety on www.fdic.gov]

F.D.I.C.'s "expectations":
"Let me set out a few fundamental expectations we have for credit underwriting, loan terms, and concentrations of credit risk. In residential lending, we expect banks to have a firm grasp on the complexity and risk in their credit portfolio. And we want them to set aside sufficient capital for unexpected losses in credit exposures that might occur.

Proper underwriting requires that a borrower's income is verified ... that credit history is reviewed, that the ability to repay is assessed and that collateral is appraised independently and not viewed as the primary source of repayment. Repayment terms should give banks a reasonable return on their loan commitment, and be economically sustainable for the borrower's income and cash flow.

In commercial lending, we expect banks to provide documented analysis of repayment capacity and collateral support, in addition to the borrower's ability to make timely payments. While we fully appreciate that commercial loan terms need to be flexible to allow for competition with other lenders ... we do not want banks to compromise pricing, covenants, or other terms to meet loan production goals.

In short, loan underwriting and administration deserve a much larger role in credit risk management going forward. Lenders need to embrace the lessons learned from this crisis. They need to establish a prudential framework for extending credit on a sounder basis."

Thank you, Chairman Bair, for having so eloquently stated the obvious. If the Feds will keep out of the way from this point forward & allow bankers to do what we already know how to do, without unnecessary government interference, we'll get it right.

 2)     Why are banks' junk fees always going up? In banker-speak, it's "non-interest income".  For the past two decades non-interest income has been a hot button for banks. Continuing education in the banking industry offers courses focused entirely on pumping up that line on the income statement. Think of sales force vs. service department at a new car dealership. In good times, sales guys are "rainmakers". Service writers, parts jockeys & techs are sideliners. When folks aren't buying new cars the roles reverse. Have you wondered how Wells Fargo-Wachovia posted record profits while other banks are begging for bailout money? Non-interest income played a major role. Crescent Bank hasn't increased a fee of any kind since 2006. Our $30.00 monthly fee for Remote Deposit Service is the lowest in the area. And let's be fair: Banks aren't alone in charging junk fees. For years we've paid disposal fees at auto repair shops & quick lubes. Every one of your utility bills is literally soaked in junk fees. Don't get me started about embedded taxes. Missed an appointment at your dog's vet lately?

3)     SBA is guaranteeing my loan. Why do they still insist on having collateral? We get this question often from entrepreneurs.  The tempting answer is, "This is an SBA loan, my friend. It ain't a government grant."  The SBA guaranty is funded by taxpayer dollars. Since the primary reason for a bank to require an SBA guaranty is the absence of or weakness in at one least of the Five C's, doesn't it stand to reason, then, that a bank should do its best to be in as strong a position as possible on the other 4 C's? For the most part, SBA borrowers lack experience and have little or no track record. Therefore, marketability & value of collateral is more important for an SBA loan than for conventional financing.

6) Have the Feds removed restrictions on lending as compared to six months ago? Onerous restrictions remain in place, which has exactly the opposite effect of helping the economy recover.  Understandably, community bankers have strong opinions on this point. All of us are feeling the effects of the present recession and all agree that a sea change is needed.   

My opinions

A)   FDIC, OCC, FRB, and state bank regulators must accept their share of the blame.

After doing so, regulators must remove onerous restrictions on community banks unless there is clear evidence of fraud or malfeasance. Well-managed community banks can come out on the other side of this debacle stronger & better, but we can do so only if the Feds allow it. Increasing FDIC coverage to $250K through 2013 was a good start, but more action is needed.

B)   The Obama administration must enact legislation to genuinely spur the economy.

Here I use the word "genuinely" in reference to President Obama's recent pledge to "reduce capital gains taxes on small business". Unless you're in the business of buying & selling real estate or heavy equipment, you don't pay capital gains taxes anyway. Offering real tax benefits to companies who hire new employees is a logical starting point. Offer a defined period of income tax amnesty for corporations that have sheltered profits overseas.  Get the money back in our economy where it belongs. Raise the purchaser tax credit to $15K and allow the credit for purchases of ALL types of real estate, including second homes, investment properties, lots, hotels, office condos, industrial, retail, & commercial. 

C)   Americans should stop making outdated & unreasonable excuses for not using a community bank.

The most-common objections we receive from prospective customers are a) "My job requires me to travel a lot & I need access to nationwide ATMs." Do you travel in areas that lack a retail or grocery store which offers cash-back on check card purchases? b) "My paycheck is direct deposit and since my employer banks with BofA (et al), I'm required to bank there, too."  All third-party payroll processors know how to make it happen, and 9 times out of 10, your boss could care less who you bank with. Don't think you're missing much? Just a daily dose of superior personal COMMUNITY BANK service.

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North Metro Atlanta community banker, Woodstock, GA