Posts filed under ‘CDFI’

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.

 

 

 

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February 27, 2013 at 11:59 am

Parents Polled About Causes of Child Obesity

NPR, the Robert Wood Johnson Foundation, and the Harvard School of Public Health recently conducted a poll to focus on what type of health decisions are made in American households on the average weekday evening.  The poll was attempting to answer why one in every three American kids are overweight or obese.

The answer, they found, was not that parents did not know that children needed healthy foods and exercise.  In fact, 95% of parents said it was important or very important to eat and exercise in a way that helps their child maintain a healthy weight. Most of the reason chopped down to how parents handled the day-to-day grind of preparing foods.  Up to 73% of parents reported that the children just liked the taste of foods that lead to unhealthy weight gain, and thus they ate the food.  The other reasons amounted to the inability to find the money or time to purchase and prepare healthy foods.

And the community environment and development had a large part to play in this situation.  The poll shows that around 25% of people reported that there were unhealthy food options that are close by, while healthy options were either not available or priced out of the family’s budget.  Additionally, when it came to walking and exercising in the community, over 20% were concerned about the safety of their children in exercising outside.

This all confirms the premise of the CDFI Fund’s Healthy Food Financing Initiative, that we need to reinvest in our communities to promote the accessibility and innovation in new ways to prepare and distribute healthy food options.  The families in our communities know and want their children to grow up healthy; eating the right foods and getting enough exercise.  However, we have systematic issues that are arising that are making it harder than necessary for these working families to make these decisions.  Through promoting new innovation in this field, and encouraging small businesses to help families meet their needs, we can encourage a healthier community to grow.

February 25, 2013 at 12:28 pm

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.

 

February 13, 2013 at 11:24 am 2 comments

Latest Assets & Opportunity Scorecard ranks NC 45th among states

CFED released its latest Assets & Opportunity Scorecard, which looks at financial security of Americans and their access to economic opportunities. The Scorecard looks at 102 outcome and policy measures, including income, net worth, assets, business ownership, homeownership, housing burden, heath care coverage, and education.

The Scorecard looks at these indicators nationally and also by state. Overall, North Carolina ranks 45th among all the states. When it comes to financial assets and income, the state is ranked 37th, and is graded a D.

  • 16.2% of North Carolinians are living with income poverty
  • 26.8% are “asset poor” which means they cannot cover basic expenses for three months in the absence of an income
  • 49.9% are “liquid asset poor,” which means they lack those assets that they could liquidate quickly– bank accounts, stocks, mutual funds, retirement accounts, etc– in the case of an emergency

asset-poverty-chart-NC

Even more troubling, North Carolina is ranked 49th and given an F grade for businesses and jobs. 16.1 percent of the population owns a microenterprise, ranking the state 41st, and 1.32 percent own a small business, ranking the state 41st.  The business ownership rate is 2.1 times higher for white workers compared to workers of color. Nationally, the rate is 1.5 times higher for white workers. Business ownership is also 2.7 times higher for men.

The scorecard has many more indicators and rankings, which together do not paint a very rosy picture for our state or for the nation. The findings give evidence for what we know is happening in communities and families everywhere– too many are still struggling to overcome their economic challenges, and unable to access opportunities to build financial security. As we’ve said repeatedly, a true and solid economic recovery will  not be possible as long as so many of our citizens continue to face such formidable challenges.

CFED does provide some solutions for the state– strengthening financial security by expanding the Earned Income Tax Credit or supporting savings programs, promoting job security by preserving unemployment insurance and extending wage subsidies, broadening access to heath care, and stabilizing affordable and accessible housing.  Included in the job security solutions is that the state should support the development of microenterprises among women and people of color, in order for them to create jobs for themselves and for others. This is exactly what CDFIs (community development financial institutions) and other smaller community-based lenders are working to do. The report we published in December shows that CDFIs are a critical player in expanding access to capital to small businesses that are increasingly left out of the financial mainstream.

There is much work to be done before the scorecard will present a better outlook, but there clearly are steps that can be taken to get us started on that path.

 

January 31, 2013 at 11:18 am 1 comment

Small Business Lending Fund helps to increase capital to small businesses

The U.S. Department of Treasury published a report looking at the impact of the Small Business Lending Fund (SBLF), which was established as a part of the Small Business Jobs Act of 2010.  The SBLF is a $30 billion fund that provides capital to community banks (with assets less than $10 billion) to increase their small business lending.  The program has allowed the Department of Treasury to invest over $4 billion in 332 institutions.

The report shows that participants in the SBLF have in fact increased their small  business lending by $7.4 billion over a baseline of $36.5 billion. Three-quarters of the participants in the program have increased their small business lending by 10 percent or more. When compared to other similar institutions, SBLF banks have seen much greater increases in their outstanding loans– 32.3 percent increase, compared to 5.7 percent for banks within their peer groups, and 2.1 percent increase for banks that are in a broader comparison group.

The Charlotte Observer reports that North Carolina institutions saw an increase of $205.3 million in small business lending through funding provided by the SBLF. There are seven North Carolina banks that have participated in the SBLF program, some of which have seen significant increases in their lending to small businesses. Live Oak Bancshares out of Wilmington, which received $6.8 million from the SBLF, saw an increase in small business lending of almost 130 percent. Select Bancorp from Greenville, which received $7.7 million, saw an increase of about 60 percent.

This is all good news for small businesses and for community banks. The SBLF is not only expanding access to capital when the larger banks have receded from lending, it is also providing support for smaller, alternative lenders. In the landscape of small business lending, as the big banks continue to pull back and as the market continues to tighten, other community based lenders and banks will be stepping in to provide services and resources. Community banks, community development financial institutions (CDFIs), and credit unions will play a larger role in small  business lending. It is encouraging that federal programs such as the SBLF are having a positive impact.

 

January 22, 2013 at 11:22 am

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.

 

 

 

January 11, 2013 at 11:42 am 2 comments

CFPB announces new “ability-to-repay” mortgage lending rule

Today the Consumer Financial Protection Bureau (CFPB)announced a new “ability-to-repay” rule, which is aimed at making sure that lenders do not saddle borrowers with loans that they can’t afford.  In order to qualify for a loan, the borrower must have enough assets or income to pay it back, they must provide financial information that is verified by the lender, and the lenders have to assess the borrower’s ability to pay over the long term, including both the principal and the interest. CFPB also announced a few proposals: to exempt designated nonprofit lenders and homeownership stabilization programs, and to create a new category of “qualified mortgages” for small creditors like community banks and credit unions. Qualified mortgages are meant to reduce the amount of risk in mortgage lending by eliminating risky features, such as negative amortization and interest-only mortgages, and offer borrowers more protection. In exchange, lenders that make certified qualified mortgages will be protected from consumer lawsuits.

The ability-to-repay rule seems like common sense, but the fact that it has to be spelled out points to just how far banks and lenders had gone in making loans to people who could not afford them. Lending standards had become so lax that people were qualifying for loans without even providing validation of their income, credit history, or even showing an understanding of the terms that they were agreeing to. Previous rules issued by the CFPB, which will be finalized this month, were meant to increase transparency with mortgage lenders and provide consumers with timely and accurate information. Borrowers need to be provided with the information they need to make sound decisions. This new rule, which will take effect in January 2014, will take it a step further. Now lenders and borrowers will have to provide some assurance that they will, in fact, be able to pay the loan. Here’s how the Chicago Tribune sums it up:

For all types of mortgages, to help determine a borrower’s ability to repay, lenders must look at eight factors. They include current income and assets, employment status, credit history, the mortgage’s monthly payment, other loan payments associated with the property, monthly payments for such things as property taxes, other debt obligations and a borrower’s monthly debt-to-income ratio.

Some banks have expressed concerns, particularly around the criteria for qualified mortgages. According to the rule, borrowers’ debt-to-income ratio is capped at 43 percent. The American Bankers Association says that this may be too low and might unnecessarily tighten access to credit. Banks will be encouraged to follow the qualified mortgage lending criteria due to the protections it offers, but the result, they claim, may be fewer borrower who can qualify for loans– in particular, low-income or first-time homebuyers.

Though the new rule may contain some tighter standards, the mortgage lending industry had run so amok that it is not surprising that the process of reigning it in is causing some consternation. Whether the debt-to-income ratio will have a significant impact is yet to be seen, and the industry has a year to adjust to the new regulations. The rest of the rule, however, is simply common sense. Banks and lenders should not be making loans to people who can’t afford them. For those who are excluded under the new rules, such as low-income families seeking to build up their assets, perhaps adjusting the rules and providing hands-on financial counseling to ensure their financial success can help balance out the equation.

 

January 10, 2013 at 12:20 pm 1 comment

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