Bank Lawyer's Blog

Stressing Stress Testing

A recent White Paper from the consulting firm Invictus discusses what those of us who represent community banks have been aware of for some time now: the requirements for "stress tests" that were supposed to apply only to those "Too Big To Fail" banks are "trickling down" to community banks. The buzzwords that apply to banks both large and small are "forward-looking risk analytics." While Invictus notes that bank regulators initially publicly stated that stress testing was only for the Big Guys, their actions belied their words (or, they simply changed their minds).

Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.

Behind the scenes, however, regulators began changing their own methods for examining community banks, relying more and more on forward-looking analytics. In recent months, with signs that community banks are again accumulating higher concentrations of risky commercial real estate loans, regulators are reminding community banks that stress testing is indeed required to manage concentration risk in their portfolios and to develop realistic scenarios for interest rate risk management.
Regulatory actions in the waning months of 2015 should serve as notice that ignoring forward-looking analytics will lead to lower CAMELS scores, more examiner scrutiny and higher regulatory capital requirements. The new current expected credit loss model (CECL), which is expected early in 2016, is also a forward-looking tool.
The large banks have already adopted forward-looking risk analytics and are using the results with regulators. Although community banks are not subjected to the same stress testing requirements as the large banks, the regulatory trend is in the same direction. Those community banks that fail to incorporate new analytics into their risk management systems will find it difficult to communicate effectively with regulators.

The White Paper traces recent public issuances by the FDIC, FRB, and OCC in this direction. A specific red flag is the December 2015 joint agency guidance on CRE concentrations. Those of us who represented community banks and their directors in the aftermath of the last meltdown, when commercial real estate brought a number of community banks to grief, took special note of that guidance. It's "guidance" in the same way vendor management guidance is merely "guidance." Try violating it and see how "sticky" the wicket gets. You'll be up to your eyeballs in MRAs on the your next report of examination...or worse.

Even if you thinkl your CRE isn't all that "concentrated," Invictus thinks that you ought to seriously consider hoping on this forward-looking train.

Even if your bank doesn’t have CRE concentrations, use forward-looking risk analytics to stress test your capital, your strategic plans and any potential acquisition you might be considering. Present the results to regulators. Invictus’ clients that have used stress testing results with examiners have seen their capital requirements decrease, their management piece of their CAMELS composite increase, and their strategic plans win fast regulatory approval.

At the very least, it's worth pausing for a moment and, while you stoop to smell the roses, thinking about whether you might benefit from this approach (if you haven't already adopted it).

Banks: Targets of Opportunity

Conservative economist Larry Kudlow claims that while bank-bashing didn't work for the Labor party in the recent UK elections, banks in the US should gear up for a round of groin-kicking from both sides of the US political spectrum as the US presidential election race heats up late this year and next. According to Kudlow, the intellectual dishonesty inherent in this tactic is apparent.

Few will admit it, but unaffordable, undocumented mortgage quotas came out of Washington, not Wall Street. And Fanny and Freddie enforced them. And while the Fed’s ultra-easy money destroyed the dollar, it also caused a bubble in home prices.

 

Yes, banks made risk-management mistakes. But when will the firing squads stop? You know, you can’t have a decent economy without banks.

 

But when will you ever hear a politician say that?

Let me guess.

 

[Sound of crickets chirping]

 

Kudlow lists the usual suspects: Lizzie Warren, Bernie ("The proletarians have nothing to lose but their chains") Sanders, and, lately, Hilarity Clinton, but also notes that Republicans are also jumping on the anti-bank bandwagon.

Of all people, former Florida governor Jeb Bush bashed banks while in New Hampshire.

But wait, didn’t Jeb’s brother preside over the big bank bailout? Oops.

 

Former Texas governor Rick Perry is slamming the banks. So is former HP CEO Carly Fiorina. She actually said, “I agree fully with Elizabeth Warren.”

As Kudlow responds: "Huh?"

 

What's next for Carly? Is she coming out as 1/32 Huron? Will she change her last name to "Simon" and make her campaign song "Nobody Does It Better?"

 

Kudlow thinks that there are valid reasons for a politician to defend banks.

Banks do make business loans, which have picked up quite a bit. They do provide mortgages, though the terms are more difficult. They do offer credit cards, decent ATM machines, car loans, farm loans, and student loans. Even though the Fed has decimated interest rates, they do allow large savings accounts. And they do, after all, connect savings with investment. (I think that was their original purpose.)

Kudlow would get rid of the Ex-Im bank, as well as the "conserved" Aunt Fannie and Uncle Freddie. He doesn't say how he'd finance the US residential mortgage market without Fannie and Freddie, and I'd like to hear his ideas on that issue, because right now, those two broke (yet cash-generating) behemoths are pretty much all there is in the secondary mortgage market in this country, at least for conventional loans.

 

But I digress.

 

While sarcastically claiming that he'd never defend banks, he ends with a warning to pols.

Sometimes British politics leads our politics. And if bank-bashing didn’t work in the U.K., maybe politicians here should let it go, and instead focus on pro-growth measures like flat-tax reform, free trade, deregulation, and sound money. Just for a moment, why not leave banks alone?

Because they're easy scapegoats, Larry. Like lawyers, everybody loves to hate them, and for the cynics we have in D.C., who value power over truth (even those--or, perhaps, especially those--who claim to speak truth to power), they are low-hanging fruit.

Study Contends Community Banks Need Relief

A recent study released by the University of New Orleans backs up what many have been contending: "Community banks in Louisiana and throughout the United States are rapidly disappearing, and federal laws meant to protect the country from another megabank bailout have saddled smaller financial institutions with disproportionately large costs."

The number of community bank charters plummeted 53.3 percent from 1993 to 2014, while the number of non-community banks jumped 17.6 percent, according to National and Regional Trends in Community Banking. The study was conducted by the University of New Orleans.

The causes include consolidation in the banking industry, competition from online banking and the crushing burden of “too big to fail” federal regulations, said Kabir Hassan, lead author of the study. The regulations are not working as intended to prevent the economy from being crippled if one of these megabanks fails.

“Actually in my reading, they have institutionalized it even further,” Hassan said. “And what it means is, when the law is made for a big bank, who suffers? The small, mom-and-pop community banks.”

[...]

Hassan spoke at a community bank meeting organized by Gulf Coast Bank & Trust Co. Sen. David Vitter, chairman of the U.S. Senate Small Business and Entrepreneurship Committee, also spoke at the meeting in Baton Rouge.

Vitter said he hopes to distribute the study’s findings as widely as possible, starting with the Senate Banking Committee.

Although the downward trend in community banking is well-known, when these complaints are brought to Washington, D.C., there are typically two responses, Vitter said. The Washington-type experts deny it is happening or say it’s an unintended consequence.

“Well, it really doesn’t matter if it’s intended or not. That doesn’t change the reality,” Vitter said.

Obviously, Vitter is an ally of community banks in their quest for "regulatory relief." It will be interesting to see how his fellow members of the Senate Banking Committee, including everyone's favorite populist, Lizzie Warren, react to the study. With a yawn and a shrug, is my guess.

As the linked article points out, the loss of community banks has potentially serious consequences for small business lending. Traditionally, community banks have been the primary source of small business loans. While some commentators believe that alternative non-bank sources (including peer-to-peer lending) will eventually substantially supplant community banks, even if true (which I doubt), that's not going to happen overnight. I recall reading in the late 1990s prognostications that the internet would make soon branch banking obsolete. Several years later, the federal banking regulators were telling consultants and bank lawyers that they'd better not bring any more "internet-centric" bank charter applications for approval, because the bloom was off that rose. While the internet, and mobile, banking channels may one day replace brick-and-mortar branches, change happens more solely than many "true believers" expect, and severe dislocations for customers can result while the paradigm is shifting.

I think regulatory relief for community banks ought to be getting more "play" in Congress than we've seen thus far. More statistical support like the UNO study may help it gain traction. Let's hope so.

Don't Ask, Don't Tell

You may recall last year's pronouncement by the head of FinCEN, Jennifer Shasky Calvery, that 105 financial institutions were, thanks to the amazing guidance provided in February 2014 by FinCEN, servicing state-legal, federal-illegal marijuana businesses. Apparently, less than 10% of those are in Colorado, land of the free and home of the dazed, because according Colorado Rep. Jared Polis, only eight commercial banks and two credit unions in that state are banking the pot biz, and none of them want to be publicly named.

I assume that they don't want to happen to them what happened to publicity-challenged MBank out of Oregon. As recently related in published reports, that Oregon bank announced in January that it was open for (marijuana) business not only in Oregon, but in Colorado, and that it had the "tacit approval" of the FDIC to bank the unbankable. Within less than a week, because it was supposedly "overwhelmed" by the response from Colorado marijuana businesses, it pulled entirely out Colorful Colorado. Now, it's announced that it has pulled out of the entire marijuana business nationally, even in its home state of Oregon, apparently haven satisfied the munchies and gotten a good night's sleep. Like the Colorado exit, the industry-wide exit is supposedly due to the unexpected response of unbanked pot sellers and the bank's determination that "the bank is not big enough to provide and support all of the compliance components required."

It may be pure coincidence, but it appears that any time a bank is publicly "outed" as a banker to the stoned, the bank pulls out of the business. None of the 105 institutions cited by Ms. Calvery or the ten cited by Mr. Polis was named. Had they been, how many of them would have "pulled an MBank"? Most, if not all, is my guess.

Unlike banking payday lending, a perfectly legal business that the regulators are trying to eradicate, banking marijuana selling, a blatantly illegal business (under federal criminal laws), is just fine with the federal banking regulators as long as the bank flies under the radar screen. It's OK to service an illegal drug business as long as you (A) file the right kind of Cheech & Chong SAR or SARs, and (B) don't ever, ever, let anyone but the illegal business owners and bank officials know about it. Do you think that this state of affairs breeds cynicism and contempt for the rule of law? Me, too.

"Don't Ask, Don't Tell." It was bad policy for the US military and it's no better for the US banking business.

Subprime May Return, But Will It Be In A Pine Box?

Former community banker and occasional guest poster Pat Dalrymple is a columnist for a Colorado newspaper who has a former insider's view on the sometimes wild and wacky world of commercial lending. You didn't think it was either wild or wacky? Read Pat's latest column.

He’s baaaack.

No, neither Jason, nor Freddie, nor Arnold has returned after having been absolutely, irrevocably annihilated in the last episode.

Rather, it’s subprime, the evil force that terrorized America, from Wall Street to Main Street to Elm Street, that may be coming soon to a closing near you.

A residential mortgage lender has announced that it’s making loans of up to $2 million that don’t require tax returns or employment verifications. Nor does it set a minimum time from a short sale that the borrower might have had. Bankruptcies and foreclosures require only two years’ seasoning after the event. Income is verified through bank statements, and an income-to-debt ratio can be as high as 50 percent.

The loan to value ratio is capped at 85 percent, but no mortgage insurance is mandated. A 700 credit score will qualify a borrower for a $2 million loan, and only 500 is necessary for a mortgage up to $750,000. And, to top it all off, cash-out refis are OK.

Sounds kind of scary, doesn’t it?

Pat parses the underwriting risks, and comes to the conclusion that money can be made on this type of lending, "subprime" or not, and that from an underwriting standpoint, it's not "scary" at all. To him, the business reward can outweigh the risk. However, the "scary" fly in the ointment is something far more terrifying than a default on an undercollateralized loan. It's something that utters the horrifying names "trial lawyers" and the Cherokee princess known as "The Spawn of She Who Dances With Donors" (h/t Dennis Miller) in the same fetid breath.

The new regulations that have come online in 2014, and this year say that lenders have a so-called “safe harbor” if they make loans underwritten to conforming, i.e., Fannie Mae, guidelines. These loans are called “qualifying mortgages.” If a loan is outside that qualifying mortgage safe harbor it means that a borrower, whose house is in foreclosure, can actually allege that the lender did not adequately assess the borrower’s ability to repay when making the loan, and sue the lender.

If the suit takes place during the first three years of the life of the loan, and the borrower is successful, that borrower can collect from the lender all the interest and fees paid during those three years, plus attorney fees (this last phrase is kind of important). After three years, there’s no cash settlement; the amount is simply offset against the foreclosure.

For a big lender, there has to be a goodly number of these cases before the company is at risk, and the likelihood of that is less in a recovering economy. But those three little words, “plus attorney fees,” really gets the attention of the class action bar.

And then there’s the regulatory risk, which could be considerable. No law or reg says a lender can’t make loans that are not “qualifying mortgages.” But the assumption of the Consumer Financial Protection Bureau, the federal big-dog regulator, is that these loans can be traps to abuse consumers. And no lender wants to spark the attention of the CFPB.

This agency has enormous power. It answers to nobody but Congress, which isn’t exactly the best manager of anything. And the bureau can levy enormous fines, called civil money penalties, on the companies and people who work for these businesses. Just one CFPB audit can pull the plug that can send a lender down the drain.

A lender venturing outside the safe harbor can be like a Methodist missionary taking pictures in North Korea.

You’re definitely being watched.

Coloring outside the lines used to be dangerous because you could lose your shirt if you didn't manage the elevated risks with dexterity and price the product appropriately to compensate for the fact that the "earners" had to more than makeup for the "non-earners." In that respect, the economics were pretty much the same as those governing a Mafia family, so most subprime lenders "got it." Today, it's much more dangerous because you may have to face your two biggest nightmares: a lawyer with an cause of action that might have actual merit, and a government bureaucracy staffed by true believers and accountable only to God/Gaia/Zeus/Baal/Richard Dawkin's Eternal Nothingness/[Insert Name of Favorite Cosmic Muffin or Nihilist Here].

That should scare away all but the psychopathic, the suicidal, or the moronic. Or, perhaps, that rare fellow who looks into the muzzle of the .44 Magnum and says to himself, "Ya' know, come to think of it, I AM feeling lucky today!"

De Novo Logjam "Open"?

No sooner do we post an article about how the dearth of new bank charters appears to be a critical (if not the critical) factor in the phenomenon known as "the incredibly shrinking community banking universe" than out of the chute pops a new community bank (paid subscription required).

Primary Bank is just the second new bank to be approved in more than four years, and charts a potential path for other applicants to follow. The approval, which was reported last week, came more than a year after regulators signed off on Bank of Bird-in-Hand in Pennsylvania in late 2013.

"This does now open the logjam. Now the [Federal Deposit Insurance Corp.] has a process, and as long as future applicants follow that process, they should be in good shape," said Donald Musso, president and chief executive of the consulting firm FinPro, which worked with the new bank's organizers to move the application.

Musso said he is in conversations with four other clients possibly interested in filing de novo applications, although nothing is official yet.

The regulators are "working really hard in trying to open the doors for new de novos to form, but the standards are pretty high," he added. "You need $20 million-plus of new capital, which is a lot of capital. You've got to have enough capital to make it to profitability."

"A lot of capital." Ya' think? When I started working on de novo bank charters, back when Andrew Jackson was trying to bring down the Bank of the United States, you needed a tenth of that amount. Of course, a dollar went a lot farther then, as my buddy Tom Sawyer5 used to say.

American Banker reporter Joe Adler correctly observes that two banks in four years "hardly makes a trend." He also notes that the community in which the new bank is located suffered the sale of local banks, leaving it "local bank free." Also, the new CEO is a heavyweight in the banking industry and a former governor of New Hampshire is a board member. The bank's business plan appears to be conservative, focusing on small business loans, with no home mortgages and, I assume (although the article does not state this), little or no commercial real estate lending and certainly not much acquisition and development lending.

Consultant Byron Richardson also notes that private equity investors do not appear to be chomping at the bit to dive into de novo banks.

Richardson said a critical obstacle to new-bank formations lately has been finding investors willing to earn a slow rate of return in the face of heavy capital requirements and other regulatory burdens.

"A founder or organizer is not just going to put their money in a mattress," he said. "Part of the equation is: How much capital will the regulators require? But then with the cost of complying with the regulatory burden… how much money can the bank itself earn?"

On the other hand, the lead investor in Primary Bank said that he wasn't phased by the "regulatory burden".

"There has obviously been some concern with Dodd-Frank and regulations, and some people say, ‘That's why there's not banking activity,'" [William] Greiner said. "Our going forward is testament to the fact that we can see opportunity. We're not focused on some of the noise per se."

Unless, of course, the "noise" raises to the level of a diving-bombing Stuka. We'll see how the bank continues to ignore the regulatory burden "noise" as time marches on. Focusing on business rather than consumer loans is one way to lower the noise level.

Another factor involved in this de novo that may limit the pool of potential investors is the large number in the group.

"Most banks start with five, eight, maybe 10 individuals…. I felt it was important, given the environment, to have a bigger, broader group. We talked about having potentially 50 investors in that initial round," he said. (They ultimately raised an initial $3 million from 133 individuals.) "I thought if we could get 50 community leaders, business owners, professionals, to come and take a stake in this bank, it would make a statement that it's not a club… but really a community-based initiative," he added.

I agree with Greiner that the FDIC loves that aspect. Broad-based community investment groups tend to be more conservative, more focused on the long-term needs of the local business community that the bank will serve than on using the bank to make profits, ratchet up stock values through growth of assets and ROE, and cashing out in five years or so. If that's going to be a requirement going forward, however, it will dampen the enthusiasm of a number potential capital sources.

While this latest approval may, indeed (as Musso asserts), "open the logjam," we'll see how wide that opening is, and whether it remains open. At present, color me "skeptical." We may see a few more of these in the next couple of years, but I simply don't yet see a wave on the horizon that yet appears to be worth riding.

No Regrets

A few years ago, we commented on the case of a Texas banker who had finally had his fill of regulators beating him down for the act of engaging in a legitimate and profitable line of business (small business lending) and who turned in his charter and became the love that dares not speak its name (but we will): "A nonbank."

Not surprisingly, the nonbank is doing just fine, thanks for asking (paid subscription required).

Such cases have been rare up to this point.

Such cases have been rare up to this point.

Having distance from bank regulation has been a boon to Depping and Ascentium in recent years. The company earned $14 million last year, and its total funded volume topped $1 billion in November. Originations should reach $630 million this year, representing a jaw-dropping 36% increase from 2014, and Ascentium is considering going public in the next year.

"I've been in this business a long time, and our results now are better than they've ever been," Depping said. "Our portfolio statistics are second to none."

Ascentium's success is noteworthy because it essentially relies on the same business plan as Main Street Bank, the Kingwood, Texas, bank Depping ran without incident for six years before regulators flagged its operation as being too risky.

There's nothing particularly complex about Ascentium's business model. It raises money from investors, including Luther King Management and Microsoft co-founder Paul Allen's Vulcan Capital, and lends it to a variety of small businesses around the country — funding everything from medical practices to trucking firms.

Loans average roughly $60,000, with very few exceeding $150,000, Depping said.

Ascentium packages many of its credits into securitizations. The senior classes of its 2012 and 2013 tranches are rated "AAA" by DBRS and "Aaa" by Moody's Investors Service, while the junior classes were upgraded earlier this year. Moody's has also lowered its cumulative net loss estimate for the securitizations to just 2%. A third securitization, consisting of $303 million of loans and leases, closed earlier this month.

This from a bank whose business model was labeled by the FDIC as riskier than traditional banking, so risky that the regulator hit the bank with an enforcement order. Yet, here is the successor, making money hand over fist in an economy that is hardly pre-crash robust.

As experts in the linked article note, "concentration" causes regulators heartburn. That's because many of the community banks that failed in the last downturn had concentrated on commercial real estate lending, especially acquisition and development lending. When the economy hit the skids and real estate values plummeted, many of them bit the dust. Nevertheless, single-minded discouragement of asset concentration fails to account for the fact that some management teams not only can "concentrate" on a line of business and manage their risks appropriately, but their laser-like focus and degree of sophistication on a specific area could very well mean that an attempt to "diversify" into other areas might increase, not decrease, the risk.

We wondered whether the "take-this-charter-and-shove-it" approach might gain a little traction. It does not appear to have done so. Still, there's at least one Texas banker, and a group of savvy investors, who are pleased as punch to be free from second-guessing by folks whose business acumen wouldn't power a cockroach on a popsicle stick one revolution around the inside of a tomato can.

Texas Banking Commissioner Chuck Cooper put it nicely.

"Some people work better in a less-regulated environment," Texas Banking Commissioner Charles Cooper said. "I'm glad Mr. Depping's venture is doing well."

So are we.

FDIC Emails Reveal A Chokehold

While the report by the Senate Democrats on CIA "enhanced interrogation techniques" has been grabbing the attention of the press, the emails released by the staff of the House Committee on Oversight and Government Reform this week should be of interest to bankers who fear choking on regulatory overreach. In June, Darrell Issa's Committee issued subpoenas for such emails to the FDIC and the FDIC turned them over. They show a clear intent on the part of some FDIC officials to deny payday lenders who are operating in accordance with the law access to the banking system.

The emails from the FDIC's Atlanta head honcho are especially illuminating. "I literally can not stand payday lending. They are abusive, fundamentally wrong, hurt people, and do not in any way deserve to be associated with banking." Therefore, he and his minions put pressure on banks to get out of the entire line of business.

He wasn't alone, of course. Other emails from other regional offices and officials in D.C. show similar intent. The attempt to link payday lending and pornography was, to the credit of FDIC lawyers, opposed by them. As many clients do when confronted with sound advice, the FDIC officials ignored their attorneys. Their intent was to persuade Congress to conflate payday lending with pornography and online gambling, not because it actually is analogous in any legal sense, but because the FDIC officials simply didn't like it. Similar treatment was accorded coin dealers and firearms and ammunition dealers, with businesses being named in the report that were denied access to the financial system because banks were exiting the "industry."

The report also alleges that certain FDIC officials "may have misled Congress" about the FDIC "partnering" with the Department of Justice in implementing Operation Choke Point. Specifically attacked is the FDIC's Acting General Counsel, the truthfulness of whose testimony before Congress is called into question by the report.

Issa has been on this hunt for awhile and, obviously, he's now naming names. In response to the increased pressure, we've seen the FDIC make baby steps in the direction of backing away from this endeavor that it denies ever having particpated in, such as the revised guidance issued this summer that proclaimed that when the FDIC said certain businesses were problematic, it was just joshing.

We'll see whether this new attitude trickles down to the regional and field levels. If it doesn't, expect Issa to continue hunting.

COMMUNITY BANKING IN THE 21ST CENTURY: THE REALITY

Here's another guest post from my friend, former community banker Pat Dalrymple, that, while not technically about bank law, is definitely about banks. Plus, I'm on the road, so Pat is taking a load off.

********************************************************************************************************************************

The demise of community banking has been predicted for the last five years or so.  Despite certain significant advantages enjoyed by this group, primarily their market position,  and advertising muscle, the prophecy is become more likely, especially for the smallest institutions struggling for profitability.

The challenge to many $200 million asset and under  banks is, quite simply, putting on acceptable loan assets:  the post meltdown regulatory environment precludes many loans that made up much of the portfolios of small community banks.

Profits are anemic, or non-existent, in a plethora of institutions across the country, compelling management and directors to reassess the very viability of the traditional banking business model.

Many industry practitioners, particularly i small market operations, have lost sight of what banking really is, simply stated:  making a profit on the movement of money.  It matters not whether it’s Chase or the 2^nd National Bank of River City, or how the money moves or, indeed, who moves it.  The business of banking is raking in revenue as the commodity circulates.

Unfortunately, a lot of community banks, especially the smaller ones, aren’t doing this well at all.  Business customers, turned down for loans, are flocking to so-called “Shadow Lenders”, non-bank

Corporations that are rapidly stepping in where banks fear to tread, often as a result of regulatory mandates. Many commercial customers can qualify for SBA financing, but too few small banks facilitate these programs.

Senior depositors make up a disproportionately larger share of community bank customers, as compared to the big league institutions, but small depositories are doing nothing at all in the area of reverse mortgages.

And then there’s the most egregious failing of all:  few banks under, say, $100 million are making residential mortgages available in their markets. On all of these activities, banks aren’t earning a nickel, when nickels are sorely needed, what with loan to deposit ratios at 50 or 60%.  But somebody is counting up those nickels, and it comes to lots of nickels.

What should they do?  Here are some thoughts:              

BUSINESS LENDING:

 This is a category that sees the majority of rejections at insured financial institutions.  Many would have qualified pre-recession, some would not have.  All are bank customers, in one way or another, most are viable borrowers for some capital source, somewhere, and all represent an opportunity for revenue.

Large non-institutional lenders, those specializing in loans for operating capital, lines of credit, and financing for short term emergencies, to name just a few, pay well for referrals.  If a bank can’t make a requested loan, the customer is shown the door, and ends up at a shadow bank anyway, often paying an additional fee to a loan broker.  Why not guide this borrower, preserve the customer relationship, and get paid for it at the same time?

SBA LENDING:

Too few small banks use this resource.  It’s another ignored profit center.  If a bank doesn’t want to put any portion of the deal into portfolio, there are plenty of capital sources that will take the loans off its hands.  And, if the bank doesn’t want the processing hassle, then there are SBA lenders that pay for a simple referral.

HECM LOANS:

Reverse mortgages are one of those product categories that community banks haven’t even thought about.  This is a bit odd, considering that there are a lot of senior customers at small banks.  There’s a pervasive lack of knowledge and a body of misconceptions about this lending product, with banks probably being even more ignorant than their customers.

The HECM concept can be an exceptional program for certain senior borrowers, and bankers need to know more about it.  Reverse mortgage wholesale lenders have partnership models that can take all of the risk, compliance and otherwise, out of originating these loans, and most of the work.  A robust reverse mortgage origination campaign could be mounted by a bank with virtually no additional expense except that for marketing.

RESIDENTIAL MORTGAGE LENDING:

 The refusal to ramp up mortgage lending is a glaring abdication of community responsibility by small banks, and an incomprehensible rejection of a profit opportunity.

Every community bank should be the pre-eminent mortgage originator in its market, but virtually none are.  Rather, small institution customers get their home loans through mortgage brokers, correspondent mortgage companies, and the mortgage divisions of larger banks.

Banks can profitably originate mortgages with almost no risk if they use the large wholesale lenders that are eager to sign banks up as production partners.   The bank needn’t use its own money to fund the loans, and most, if not all of the compliance risk is taken on by the wholesale partner.

There’s a simple way to determine the amount of revenue that a community bank might be leaving on the take:  take a given 12 month period, and determine how many bank customers secured a mortgage, either to purchase refinance, through another source.  Since small bank customers are among the most loyal consumers on earth, assume that a healthy percentage of those loans would have been initiated and facilitated by the bank, and then multiply the aggregate dollar amount by the “Lender Paid Compensation” offered by the wholesale lender.  The amount of foregone revenue is often shocking.

One final suggestion:

Market these services!  Someone once looked at the rapidly changing face of banking, especially as it relates to the little guys, and opined, “Bankers are like dinosaurs, standing in the swamp, waiting for the weather to change”.

Don’t wait.   Don’t let everybody else make that profit on money movement to your bank customers.

MJ Co-Ops: DOA?

Readers may recall the brilliant idea for "cannabis co-ops," hatched by Colorado legislators who, sunshine on their shoulders, were not only crying at the beauty of the concept, but apparently flying at 30,000 feet on a Rocky Mountain High. And, of course, as was the case with the Dude's soiled floor rug, they were looking for a way to "tie the room together."

Notwithstanding that the law passed and was signed by Colorado's ever-optimistic governor Hickenlooper (yes, that's his real name) in June, according to this morning's The Denver Post, the idea has generated as much movement as a convocation of stoners with a sweet tooth and a gross of Hasheys Bars.

Even with the flurry of international publicity that swirled last spring around the groundbreaking effort — one that theoretically would allow pot businesses to band together and form their own banking entity — there has been lukewarm interest in giving it a try without first knowing it's not a useless effort.

As such, there hasn't been a formal application to the federal agency that would have to approve one.

That "federal agency" is the Federal Reserve.

For now, the Federal Reserve hasn't said one way or the other — probably because there hasn't been a formal application for access to the nation's financial system.

My guess is that the Federal Reserve will channel the spirit of Nancy Reagan and "Just Say No!" On the other hand, it may adopt the response that federal banking regulators have thus far revealed with respect the requests of the governors of Colorado and Washington for regulatory guidance to banks on banking "legitimate" marijuana businesses in their states: The Mount Rushmore Response. This involves impassive staring and no audible sound.

According to cannabis industry representatives, while no applications have been filed yet, they are "seeing some movement" on the cannabis co-op front. Unfortunately, the initial meeting to discuss the first application never got off the ground when chief organizer "Dave" was unable to gain access to the conference room.