Banking on Banks and Credit Unions

first_imgBanking on Banks (and Credit Unions) By Pamela Hulse Andrews, Cascade Business News In trying to figure out just where the lending industry is on helping businesses to grow, owners are still finding frustration with credit opportunities. Banks are posting very positive balance sheets and appear to have an abundance of money available to lend. Yet there is mounting criticism that banks are not making this money obtainable to business.An article posted on Forbes website last week noted that “banks are not lending like they should, and with good reason.” The article by Richard Finger defended banks for their lending practices citing low interest rates that provide the bank less than a 3 percent net interest margin. New regulations, according to Finger, have made operating a bank much more cumbersome and expensive.  Regulations from certain provisions on mortgage lending in the Dodd Frank Wall Street Reform Act of 2010 are “already blowing some cold air in the marketplace.” In January of this year, the CFPB (Consumer Financial Protection Bureau) released the mortgage lending guidelines that went into effect January 2014. Some of the outstanding features are: 1) a borrower may not have a debt-to-income ratio of greater than 43 percent, 2) fees and points may not exceed 3 percent of the loan amount, 3) lenders must verify a borrower’s income 4) no mortgages greater than thirty years and no interest only or negative amortization loans.In addition, some bad mortgage assets still linger, not yet fully resolved after five years on the balance sheets of the four biggest banks: Citigroup, JP Morgan, Bank of America and Wells Fargo. Mortgage settlements at Bank of America alone are near $50 billion and the pain’s not over yet as more lawsuits are being filed.Forbes presented its own perspective in that the Qualified Mortgage Rule will serve as a paradigm for the law of unintended consequences. Finger doesn’t agree with those who assert that these Dodd-Frank provisions are reasonably well-intentioned efforts to protect a “defenseless” consumer against predatory lending practices. He says: “Under current proposals there is no protection for a bank. In our no fault society, with its ethos of no responsibility, banks’ natural caution will bite them. Borrowers will start suing banks for not making loans.”All of this leaves businesses with a ‘what are we suppose to do and how do we grow our business under this environment?’  Many locally owned businesses are struggling to secure the financing they need to grow.  Even with capital assets, good balance sheets and improved credit ratings, both banks and credit unions are putting them through unreasonable hoops to even apply for a loan.These same locally owned businesses are a primary source of new job creation and contribute to higher median household incomes and increase social capital.  Yet independent businesses in many sectors are losing market share, while the number of new startups has steadily fallen over the last two decades.  Insufficient capital is a key culprit driving these trends.Since 2000, bank lending to large businesses is up 36 percent, while small business loan volume has fallen 14 percent and  “micro” business loans — those under $100,000 — have plummeted 33 percent, according to a new analysis from the Institute for Local Self-Reliance.In the 2014 Independent Business Survey, 42 percent of business owners who desired a loan in the previous two years reported being unable to obtain one. Startups, businesses with fewer than 20 employees, and enterprises owned by minorities and women are having an especially difficult time. Some of the main points of the survey:Credit unions account for less than 7 percent of small business loans, but have significantly expanded their lending in the last decade, growing from $14 billion in business loans to over $44 billion today. However, only about one-third of credit unions currently participate in this market. Federal loan guarantees, provided through the U.S. Small Business Administration, have historically played an important role in expanding credit to small businesses that don’t quite meet conventional lending requirements. In an alarming trend, however, the SBA has dramatically reduced its support for smaller businesses and shifted more of its loan guarantees to larger businesses. Since the mid 2000s, the number of business loans under $150,000 guaranteed by the SBA each year has fallen from about 80,000 to 24,000. Meanwhile, the SBA’s average loan size has more than doubled to $362,000.Although Central Oregon’s community banks state that they have ‘money to loan’ our local community banks provide a disproportionate share of small business loans. It is their decline, in both numbers and market share, that is largely to blame for the constriction in small business lending. As local banks lose ground to big banks, there are fewer financial institutions focusing on small business lending and fewer resources devoted to it. The top four banks now control 43 percent of all banking assets, but account for only 16 percent of small business loans.  Crowdfunding has garnered a lot of attention recently as a potential solution to the small business credit crunch, but crowdfunding is a tiny drop in the bucket, compared to the resources of the banking system.  At the beginning of 2014, banks and credit unions had about $630 billion in small business loans on their books.  The total volume of business financing provided through crowdfunding amounts to less than one-fifth of one percent of this. Although crowdfunding is expected to grow and emerge as a potential source of capital for local enterprises, it does not preclude the need to fix the structural problems in our banking system that are impeding the development of local businesses. Several things need to happen to help small businesses receive funding including expanding community banks, allowing credit unions to make more loans to small businesses and reorienting the SBA’s loan programs to once again meet the needs of truly small businesses. Pinterest E-Headlines Facebook LinkedIn Twittercenter_img Email Google+ on May 8, 2014 Share. Tumblr 0last_img

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