Is small business lending in NC doing better than the nation?

The Federal Deposit Insurance Corporation released data on bank statistics yesterday, showing a continuing trend of sluggish small business lending nationally. Inc.com reports that while commercial and industrial loans increased by 12 percent from 2011 to 2012, small business lending (here defined as loans under $1 million) only saw a meager 0.4 percent increase.

In North Carolina, the FDIC data show that small business lending has not kept pace with commercial and industrial lending overall; however, it has seen a much bigger increase than the national average.  Commercial and industrial loans issued by North Carolina banks increased 13 percent between 2011 and 2011, and loans under $1 million increased 5 percent. The data for very large banks (those with assets over $1 billion)  mirror this trend.

Despite the gap– small business lending is still lagging behind lending overall– this is significantly better than the national statistic. The question is, why? We continue to hear from our borrowers that accessing bank loans is still difficult, even for those who may have had bank loans in the recent past. More research would need to be done in order to figure out what is driving this data, however we have a couple of theories.

First, bank consolidation has meant that the operations of the large banks have become more concentrated. North Carolina has seen a significant number of bank mergers, and several of the major national banks are headquartered here. The FDIC only measures loans made to U.S. addresses– it does not distinguish whether or not the loans made by NC banks are to addresses within the state. It could be, therefore, that while banks are issued from bank locations in NC, the loans are actually to borrowers elsewhere.

Second, there is the question of who the banks are lending to. As we showed in our analysis of small business lending in NC, while large banks had a vast majority of lending resources, they were concentrating those resources on upper- and middle-income areas. We also had commented on a study by the National Bureau of Economic Research, which found that many more small businesses than originally though were accessing bank capital to finance their ventures. What the study also found, however, is that gender and race had an impact on a small business owner’s ability to secure outside capital.

As already mentioned, more research would be needed to answer these questions. If North Carolina is, in fact, doing better than the nation, it is important to ask why and find out who is benefiting. Digging deeper into the data may reveal that while small business lending is increasing, those who have historically faced barriers to accessing capital continue to do so.

 

 

 

Bank loans may be easier to get than we thought, but not for all businesses

SCORE’s Small Business Blog posts today about a study by the National Bureau of Economic Research that finds that start-up firms actually rely more heavily on bank loans and debt financing than most people think. Given recent trends in bank lending, many small businesses have faced increasing barriers to accessing capital from traditional lending sources, such as banks, leading many to rely on personal debt, raising funds from their family and friends, and credit cards to finance their ventures. However, this study,  based on the Kauffman Firm Survey which tracks 5,000 businesses over time, has found that these firms actually use more debt financing:

• Debt was used five times more than equity
• On average 25% of the startup’s capital structure was in the form of a bank debt
• The average bank loan was approximately $48,000
• Only 25% of entrepreneurs used personal credit cards for financing

SCORE’s blog post concludes that small businesses should not give up on the idea of getting a bank loan. The post points out that a bank loan “may not be for every entrepreneur,” which is actually a very important point to make. While it is encouraging to see data showing that capital may not be as restricted as we think it is, it’s still important to question who might be getting these loans, and who might still be left out.

The NBER study actually begins to answer this question by discussing the impact of gender and race on the use of outside capital:

• The average female-owned business had 5% less outside debt than the same male-owned business
• The ratio of outside debt to total capital was 13% lower for black-owned businesses than for comparable white-owned businesses.

Our own study of small business lending in North Carolina found that while the large banks hold a majority of lending resources, there are disparities in where those resources are deployed. Small business lending by the larger banks is more concentrated in upper- and middle-income areas, compared to lending by community development financial institutions (CDFIs), which is concentrated in low-income areas. Banks’ investment in upper-income census tracts is 250 times higher than it is in lower-income tracts.

In the end, a working flow of capital is necessary for businesses of all types and sizes to start up and continue to grow. Banks play a big role in providing capital, but they do not reach everyone. The NBER findings are encouraging, but there are still many who are not served by the  mainstream financial sector. Other factors, such as gender, race, and income also come into play and impact whether or not entrepreneurs can access affordable capital.

 

Small business optimism up for 2013

Wells Fargo and Gallup have released their Small Business Index, which is a survey of small business owners on their current financial situation and their views on what the next 12 months have in store. The survey includes 601 small business owners, and was conducted during the first two weeks of this month.

The big takeaway from the survey is that small business owners are more optimistic about their prospects than last quarter. The index was up 20 points on overall optimism than in November 2012. This is due to business owners feeling positive about their performance in terms of revenues, capital spending, and jobs in the past year, and also feeling positive about their prospects for revenues, cash flow, jobs, and their overall financial situation in the year ahead. As Inc.com states, this is  “a dramatic turnaround from the end of last year, when the part of the index that measures business owners’ future expectations plunged to its lowest level since the start of the financial crisis.”

On the down side, it does not appear that hiring will increase significantly. Seventy-one percent reported that there will likely be no change in the number of jobs at their businesses, while the number of businesses that will add jobs did not increase from the last quarter. Even those who say they will hire are expecting to hire fewer jobs than they ideally would need. The primary reasons for this include that they don’t need any more workers, they are concerned about having enough consumer demand to support new jobs, the state of the economy, and potential costs of health care. Coincidentally, those businesses that are expecting to hire say they will do so because of increased demand.

These findings corroborate previous small  business surveys that we have reported on. Although there are a variety of issues that affect business owners, consumer demand and economic stability rank as the top factors. In order for these businesses to be successful, they need people to purchase the goods and services they offer. As the economy overall improves– and as individuals and families regain financial stability– the prospects for small businesses will also improve.

In related small business news, it appears that banks are also taking stock of their prospects when it comes to small business lending. Business News Daily reports that Bank of America, in response to its perception of small business lending as a growing opportunity  will be stepping up its efforts in this area, as it has recently hired more than 1,000 small business lending bankers. On the other hand, Bloomberg reports that Citigroup will be letting go of small business bankers, as a “realignment” within the company.

The economic recession and its ongoing impacts have changed the landscape for small businesses dramatically. From consumer demand to accessing capital, small businesses have faced a great deal of uncertainty in recent years. The various surveys of small businesses and the shifting roles of both big and small lenders all show that businesses and lenders alike are still trying to figure out and adjust to these changing conditions. But until the underlying challenges are addressed, the uncertainty will persist.  Many of the challenges faced by both businesses and lenders will be alleviated when economic recovery really reaches all communities– particularly those areas where small businesses are the main generators of economic activity.

New mortgage rules could help credit unions & small banks

Yesterday, we blogged about the new “ability-to-repay” mortgage lending rule announced by the Consumer Financial Protection Bureau. The rule sets forth stipulations to help ensure that borrowers can actually afford the loans that they qualify for. Again, it’s just common sense. But some in the banking industry warned that some of the stipulations, particularly those regarding “qualified mortgages” would tighten the credit market and make getting loans harder for certain borrowers like first-time buyers and  low-income people. But in fact, the new rule creates an exemption for small lenders, which may open up the market.

CFPB’s rules state that to be a certified qualified mortgage, borrowers must be evaluated on a range of criteria, including their income, credit history, debt, and others. The loan can’t have any of the more risky features like balloon payments or interest-only loans. In exchange, the lender would gain greater protection from consumer lawsuits. The biggest sticking point seems to be that the borrower must not have a debt-to-income ratio of more than 43 percent. This is a measure of how indebted borrowers are, comparing their income with the debt that they already have prior to taking on a mortgage. Banks say that this will significantly restrict the pool of eligible borrowers, and thus will tighten the credit market.

The catch is that there is an exemption for small banks and lenders with less than $2 billion in assets. If banks and credit unions that are below this threshold, and keep loans on their books rather than selling them, they could get the exemption to the stipulations laid out for qualified mortgages. Smaller lenders also have more flexibility with the types of loans that they can make.

What this means is that, while the larger banks may find that their pools of eligible borrowers shrinks, other lenders will be able to step in. This makes sense. For low-income and underserved borrowers, the type of hands-on financial counseling and training that credit unions and smaller banks and lenders provide is critical. Community banks, credit unions, community development financial institutions (CDFIs), and other lenders are better positioned to take on the risk associated with these borrowers, as they are designed to provide additional support to ensure borrowers’ long-term success. As discussed in a report we released last month, community lenders like CDFIs step in to fill gaps in lending and financial services, reaching individuals not served by the financial mainstream. With the new mortgage lending rules, these lenders will continue to do so.

So in the end it seems that the concerns expressed by some in the banking industry may be a bit over stated. The market will no doubt shift. The new rules create a new playing field that all providers will have to adjust to. But as some consumers find that they no longer can access credit at the major banks, other lenders will step in to create new pathways.

 

 

 

Banks agree to two settlements on mortgage lending

Major banks have once again agreed to a settlement, this time worth $8.5 billion, to compensate homeowners whose homes were fraudulently foreclosed upon in 2009 and 2010 through practices such as “robo-signing.” JP Morgan Chase, Bank of America, and and Wells Fargo will pay $3.3 billion to homeowners, and the remaining $5.3 billion will reduce mortgage bills and forgive principals on homes that were sold for less than what the owners owed on their mortgages. 3.8 million homeowners will be eligible to receive compensation ranging from a few hundred dollars to a maximum of $125,000.

In another settlement, Bank of America has agreed to pay the federal housing finance agency, Fannie Mae, $11 billion for selling the agency bad mortgages that defaulted, causing Fannie Mae to assume all the losses. $3.6 billion will be used to compensate for the bad mortgages, and $6.75 billion will be used to buy back mortgages.

Both of these agreements are part of a process to mitigate the impacts of the housing crisis and to hold the banks accountable for their role in both creating the housing bubble and in using questionable, if not fraudulent, methods in servicing their loans and processing foreclosures. Having faced significant losses, Bank of America continues to move out of the mortgage market, and in the deal with Fannie Mae, it agreed to sell the servicing and collection rights for 2 million loans, totaling $306 billion. Some economists and analysts are concerned that as the major banks shift away from mortgage lending, the industry is being consolidated into the hands of a few banks. However, though the housing market is recovering slowly, banks, such as Bank of America, might not be in a position to compete, given the losses they’ve already incurred and the problems they’ve had in servicing loans.

More importantly, for people who lost their homes, the question is whether the $8.5 billion deal will provide much in terms of compensation. The loss of a home can hardly be compensated for with a few hundred or even a few thousand dollars. Those who receive the higher end of compensation may be able to find a home, but that depends on a range of factors, including home prices where they live and their personal financial situations now. The foreclosure crisis left many individuals,families, and neighborhoods in severe financial distress.

These one-time settlements and small amounts of compensation will not address the systemic challenges that people and communities continue to struggle with. As we previously blogged about, foreclosures have impacted communities on multiple levels, from increased crime, reduced revenue, neighborhood blight, and displacement of families. As NeighborWorks stated in a report on foreclosures and communities, “Not only are people losing homes, but also communities are suffering economically, physically, and socially.” What is needed are more broad-based recovery policies to help communities recover and become more resilient in the long-run. Homes are the building blocks of communities, and communities are the building blocks of our economy. Helping individuals with monetary compensation may be a part of an overall strategy to mitigate the impacts of the mortgage crisis, but it cannot be the only strategy.