By Lon S. Cohen
When the Treasury Department announced the Capital Purchase Program (CPP) within its Troubled Asset Relief Program, it was an attempt to push a little more steam through the stalled economy’s engines. The program was designed to infuse capital into the system through healthy financial institutions. The hope was to increase lending at banks that were reluctant to put money on the table for the consumer credit market.
So far, that hasn’t happened.
To put it bluntly, Chris Penn, CTO of the Student Loan Network, a student lending company, said, “Consumer credit has fallen off of a cliff.”
He pointed to the numbers. For the month of November 2008, the revised total in outstanding consumer credit for the nation was down $11.1 billion. In December the same index came in down another $6.6 billion. Penn attributes the consistent fall in credit consumers carry to a variety of factors including, the inability by consumers to borrow and chargeoffs by lenders giving up on collecting delinquent outstanding debt.
“One look at the charts for consumer credit reveals everything you need to know about the consumer’s ability to access credit,” he explained. “Those consumers who are eligible to borrow – which in some circles are at greater than 700 FICO and below 20 percent Debt-to-Income Ratio (DTI), a nearly fictional consumer – are not borrowing because they’ve retrenched.”
Penn went on to point out that it’s a basic supply and demand problem – supplies dried up as credit restrictions on the part of the banks made money scarce, which then turned into a demand problem as consumer confidence fell to all time lows since the start of recordkeeping in 1967.
Not a good place to start a stimulus. It’s like the old chicken-and-egg conundrum, which came first, the problem with consumers or with lenders?
So, as with every financial stimulus plan, the fear is that,it might stall before it gets out of first gear. So, what happened? When banks initially applied for CPP funds, the expectations were high, according to the banks’ own reports. The banks were not short on will, positively touting the CPP as a way to help provide quality lending to consumers.
In December, Michael P. Hosey, president and CEO of the Elmira Savings Bank stated that his bank was “pleased” at the approval of a $9.09 million purchase of Elmira preferred stock by the Feds. Hosey went on to say that his bank remained “strongly committed to supporting the economy in our local markets.”
Many banks that took the CPP funds voiced their high hopes of being able to provide quality service to their customers by continuing to lend to qualified customers.
Deborah C. Wright, Chairman and CEO of Carver Bancorp, Inc., located in New York City, said that the CPP funds “increases our capacity to provide credit to businesses, consumers and owners of real estate in our markets and to further assist struggling borrowers, as needed.”
Wright went on to stress that the need to invest in “our nation’s inner city communities is acute and Carver will continue to utilize its new capital consistent with our history as a community banker to New York City’s urban communities.”
Banks have seized up or become “zombified” – meaning that they take Federal money to survive but don’t necessarily make loans to customers, providing essential liquidity for the market as normal banks do.
Just because you’re a bank and you now have a few bucks to lend, does that mean the customers will come banging down your door to borrow money?
Surveying the current lending conditions for various New York banks, the answer is that after taking part in the CPP, some banks are finding qualified borrowers, especially smaller banks.
Lockport, NY based First Niagara Bank took $184 million CPP funds. When they took the money, they had certain expectations about the marketplace.
“We’ve been doing exactly what we planned to do when we voluntarily agreed to participate in the CPP,” said Leslie Garrity, VP of Public Relations & Corporate Communications. “We were actively lending before the CPP. And, First Niagara has lent more than four times as much capital as it received through Treasury Department’s $184 million CPP investment during the fourth quarter of 2008.”
Though not a requirement of the CPP, First Niagara disclosed its loan data to the public, saying it wanted complete transparency into how it’s making use of the government’s money. According to First Niagara’s voluntary report, the bank originated $814.7 million in new loans and lines of credit during the fourth quarter, increasing lending by $126.0 million, or 18 percent compared to the third quarter of 2008. First Niagra says it will make its numbers publicly available every quarter as long as it participates in the program.
And with many of the super-regional and bigger banks sidelined, First Niagara sees ample opportunity to find qualified customers. But Garrity does admit, “Consumers and businesses are being cautious about financing decisions.” Still, she sees good business opportunities out there for her bank “and we are getting after it, while maintaining our longstanding discipline on underwriting criteria.”
In spite of the economic crisis, new banks continue to crop up. Are they seeing enough traffic for their loan offerings? David Bagatelle, the President and CEO of Herald National Bank based in New York City said that, “Yes, there are qualified clients out there for us to lend to.”
Because of there is a large pool of out of work bankers to choose from, Herald can afford to be selective in who they hire. Bagatelle said that his bank is committed to recruiting only “top banking professionals with strong pre-existing relationships.” This means the bankers they bring on are coming in the door with a list of qualified borrowers already in their Rolodexes.
But is there a borrowing market out there right now or are customers less willing to seek any financing?
“There is a strong borrowing market among middle-market and private businesses,” Bagatelle said. “Some are looking to capitalize on opportunities they see, while others are ensuring that they have the cash flow to weather this downturn.”
He did admit that there is a part of the market that is over-leveraged right now and that shouldn’t be borrowing. “If they are, it is often as a last resort,” he explained. “Which, of course, a bank would view as risky for all parties,” – banks and customers, both.
Even with all the rosy prospects there must be a reason that these smaller, scrappier banks are enjoying such a robust originations outlook in the middle of this downturn. Don’t they read the papers? Don’t they know that it’s not the same market that it was, say three or fours years ago?
“Clearly, three or four years ago the typical consumer or commercial borrower had more choices in terms of institutions that were willing to extend credit to them,” said First Niagara’s Garrity. “Now, we’re seeing that bigger banks lack the capital to serve even their good customers. We’re stepping into that void, picking up new business and taking share.”
Essentially, Herald National Bank is utilizing the same logic for its new business. They plan to find borrowers while everyone else is entrenched with their own troubles. Bagatelle put it this way, “What is considered cautious by us and traditional by industry standards makes us very competitive today – the reason being that our competitors have tightened their valves and are busy concentrating on fixing problems rather than growing their businesses and their clients’ businesses.”
If it’s one particular area of lending that’s providing a strong front over all others, First Niagara is not seeing it. They are seeing qualified borrowers from across most areas of consumer credit.
“We continue to see the same level of qualified applicants for all the consumer loan products that we offer,” said Garrity. “Our ‘conversion’ rates (loans booked vs. applications taken) are virtually identical ‘07 vs. ‘08, which indicates the quality of the applicant is pretty much the same.”
There is one type of loan not doing well; unsecured debt-consolidation loans to non-homeowners. “The one area that we have seen a decrease in demand is ‘unsecured’ consumer loans,” she said. “With variable rates being so low, many consumers can get a very attractive rate credit card line, that we have chosen not to compete with.”
So while some banks have seen success in finding qualified borrowers, we can say that this does not seem to herald a pot of gold at the end of the rainbow after this torrential economic storm. Employment issues are preventing plenty of consumers from seeking out financing for any big purchases.
“Those are consumers who immediately lose access to borrowing due to Debt-To-Income (DTI) or just sentiment – hunkering down and not spending, not borrowing,” said Chris Penn. He further offered his prognosis of the state of borrowing. “Everything hinges now on employment. For consumer credit to turn around, sentiment must lead the way, encouraging people that it’s okay to spend a little now. Even things like mortgage modification and other proposals have to take a backseat to jobs, because no matter how generous you are with mortgage modification, if the person has no job, they have no ability to repay, period.”
“And that’s the state of consumer credit,” he said, ending his assessment. “Aren’t you glad you asked?”
Lon Cohen is a freelance writer based in New York. He has more than seven years’ experience working in and writing about the banking industry. You can reach him at firstname.lastname@example.org