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A crop of new lenders is jumping into the subprime personal-loan market, wooing consumers with flawed credit. Among these firms is FreedomPlus, a lender which targets people with credit scores between 600 and 700. It offers loans up to $35,000, to be repaid over two to five years at rates ranging from 7.49% to 36%. Randy Green, a U.S. Air Force paramedic benefitted from the service. He lacked a long credit record, making it difficult to get a personal loan. So he borrowed on credit cards, paying interest rates upward of 20%. FreedomPlus stepped in with more favorable terms, lending $4,000 to be repaid over three years at an annual rate of 18%. "We see the term ["subprime"] as derogatory," said FreedomPlus President Joseph Toms said. Instead, he calls the market "emerging prime."
President Obama's latest budget contains a few surprises for bankers. First, the budget predicts that the Federal Housing Administration, which announced in September it would need a $1.7 billion bailout, will have a positive year-end capital reserve of $7.8 billion and require no more transfers from Treasury. The proposal also includes new funds for housing, with $1 billion in spending to capitalize the National Housing Trust Fund. The affordable rental and housing program has been in turmoil due to the conservatorship of Fannie Mae and Freddie Mac. This $1 billion allocation would "jumpstart" the fund. The Securities and Exchange Commission and the Commodity Futures Trading Commission also saw a bump in funding. But perhaps most controversial is the administration's call for a new "financial crisis responsibility fee" on the biggest banks to help pay down the Troubled Asset Relief Program.
The newly released White House budget for FY 2015 contains $225 million in total CDFI Fund program funding, $1 million less than FY 2014's approved funding level. Of that total, $151 million has been set aside as CDFI financial assistance funding, up from $146 million in the final FY 2014 budget. Funding for the Bank Enterprise Award was absent from the budget. In FY 2013 and 2014, that award received $18 million in total funding. The White House has also proposed a $13 million increase in Healthy Foods Financing Initiative funding to $35 million. Funding for the CDFI Fund's Native Initiatives remained steady at $15 million.
Urban Partnership Bank's plan to close a South Shore branch has left neighbors concerned about the developer's plans for the location. Neighbors said they were enthused when the developer initially proposed bringing Chipotle or Potbelly to the site, but felt let down when the developer revealed a proposal to bring in a drive-through-only McDonald’s instead. Urban Partnership plans to maintain some presence at the site with an ATM or banking kiosk. “We thought everyone would benefit if it was redeveloped and some much-needed retail was brought to that location,” said Brian Berg, a spokesman for the bank. In order to ease the transition, the bank is holding a series of training events for customers who want to learn more about online banking.
A new paper form the Mercatus Center at George Mason University finds that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has significantly affected small banks and their customers. In a survey distributed to 200 small banks, a large majority of respondents viewed Dodd-Frank as more burdensome than the Bank Secrecy Act. Participating banks reported compliance costs had substantially increased in the wake of new regulations as banks hired new compliance personnel or increased their reliance on outside experts. The survey also indicated the increased regulatory burdens will cause small banks to reconsider their product and service offerings, including the possibility of discontinuing residential mortgages and overdraft protection.
David Reiling, Sunrise Banks CEO and CDBA Director, won the Good Leader Award at Minnesota Business Magazine's Community Impact Awards. The awards are intended to recognize leaders and businesses that take tangible, life-changing actions that have a real impact on the people touched by their efforts. The magazine recognized Mr. Reiling as a social entrepreneur with 25 years of innovation experience in community development finance. They praised his advocacy on behalf of underserved consumers and Sunrise Banks' work with Hmong and Somali immigrant communities. Sunrise Banks also qualified as a finalist for the Midsize Best in Class Award.
The Center for Financial Services Innovation provides a set of aspirational guidelines for small-dollar credit products. The report emphasizes responsible underwriting as a key component of a high-quality small-dollar credit product. It also focuses on the importance of proper loan structure and pricing to maintaining the borrower's ability to repay. It defines the ideal small-dollar credit product as one which is made with a high confidence in the borrower’s ability to repay, is structured to support repayment, aligns profitability for the provider with success for the borrower, gives the borrower greater financial health, has transparent marketing, is convenient and provides rights for borrowers. The report provides detailed strategies for bringing credit products in line with each of these principles.
Kansas City's KC Storefront Initiative aims to make loans to small businesses—particularly those run by women and minorities—that haven't been able to get banks to extend credit to them. Since the initiative's launch in mid-2012, more than 140 entrepreneurs have received a total of $1.2 million in financing. The loans are made by Justine Petersen, a St. Louis-based microlender that Kansas City officials recruited to run the program. But the city has played an active role in facilitating the loans. Kansas City has donated office space to Justine Petersen and contributed $110,000 to the microlender's loan-loss reserve fund. The loans range from $1,000 to $50,000—the average loan amount in 2013 was $12,000—and interest rates are roughly 8.25% to 12%. The default rate has been just 2% so far.
The Neighborhood Assistance Corporation of America, a Boston-based nonprofit lender, is making waves with its vocal advocacy in favor of reviving a more sustainable version of the subprime mortgage market. The organization's mission is to expand homeownership with mortgages to lower-income borrowers on terms that are both profitable and sustainable. It is half lender, half community organization. Applicants are subject to careful screening and, upon approval, are required to participate in the organization's advocacy efforts. The lender also replaces the typical mortgage insurance with a requirement that borrowers contribute to an emergency fund. This fund is lent out to borrowers facing medical emergencies or a job loss, preventing defaults. The organization's default rate has been low; of the 4,005 loans it made from 2004 to 2006, the peak of the housing boom, only 2.6 percent lost their homes to foreclosure--less than a third the national rate.
A new study of FDIC statistics finds that the number of small banks and their share of US banking assets declined substantially since 2000 while the five largest US banks expanded. Small banks’ share of domestic deposits fell from 40 percent to 23 percent since early 2000 while their share of US banking assets declined from 36 to 19 percent. The five largest banks now hold 44 percent of US banking assets and 40 percent of domestic deposits—up from 23 percent and 19 percent, respectively, in early 2000. Some of the decline among small banks is organic, as market forces encourage combinations in order to spread operational costs over a larger customer base. Increasing regulatory burdens, which absorb a larger percentage of small banks' budgets, also encouraged consolidation. Other banks have simply outgrown their 'small' status. But more than five percent of small banks were found to have failed in the wake of the economic crisis.