Category Archives: Commercial Banking

Is Banking Deregulation Starting to Work ?

Ed Mills, a Washington policy analyst at Raymond James, answers some of the most frequent questions swirling around the deregulation discussion working its way through Congress, the changing face of the Fed and other hot-button issues within the banking industry.

Q: You see the policy stars aligning for financials – what do you mean?
The bank deregulatory process anticipated following the 2016 election is underway. The key personnel atop the federal banking regulators are being replaced, the Board of Governors at the Federal Reserve is undergoing a near total transformation, and Congress is set to make the most significant changes to the Dodd-Frank Wall Street Reform Act since its passage. This deregulatory push, combined with the recently enacted tax changes, will likely result in increased profitability, capital return, and M&A activity for many financial services companies.

Perhaps no regulator has been more impactful on the implementation of the post-crisis regulatory infrastructure than the Federal Reserve. As six of seven seats on the board of governors change hands, this represents a sea change for bank regulation.

We are also anticipating action on a bipartisan Senate legislation to increase the threshold that determines if an institution is systemically important – or a SIFI institution – on bank holding companies from $50 billion to $250 billion, among other reforms.

Q: Can you expand on why Congress is changing these rules?
Under existing law, banks are subject to escalating levels of regulation based upon their asset size. Key thresholds include banks at $1 billion, $10 billion, $50 billion and $250 billion in assets. These asset sizes may seem like really large numbers, but are only a fraction of the $1 trillion-plus held by top banks. There have been concerns in recent years that these thresholds are too low and have held back community and regional banks from lending to small businesses, and have slowed economic growth.

Responding to these concerns, a bipartisan group in the Senate is advocating a bill that would raise the threshold for when a bank is considered systemically important and subjected to increased regulations. The hope among the bill’s advocates is that community and regional banks would see a reduction in regulatory cost, greater flexibility on business activity, increased lending, and a boost to economic growth.

The bill recently cleared the Senate on a 67-31 vote, and is now waiting for the House to pass the bill and the two chambers to then strike a deal that sends it to the president’s desk.

Q: What changes do you expect on the regulatory side with leadership transitions?
In the coming year, we expect continued changes to the stress testing process for the largest banks (Comprehensive Capital Analysis and Review, known as CCAR), greater ability for banks to increase dividends, and changes to capital, leverage and liquidity rules.

We expect the Fed will shift away from regulation to normalization of the fed funds rate. This could represent a multi-pronged win for the banking industry: normalized interest rates, expanded regulatory relief, increased business activity and lower regulatory expenses.

Another key regulator we’re watching is the CFPB (Consumer Financial Protection Bureau), which under Director Richard Cordray pursued an aggressive regulatory agenda for banks. With White House Office of Management and Budget Director Mick Mulvaney assuming interim leadership, the bureau is re-evaluating its enforcement mechanisms. Additionally, Dodd-Frank requires review of all major rules within five years of their effective dates, providing an opportunity for the Trump-appointed director to make major revisions.

Q: We often hear concerns that the rollback of financial regulations put in place to prevent a repeat of one financial crisis will lead to the next. Are we sowing the seeds of the next collapse?
There is little doubt the lack of proper regulation and enforcement played a strong role in the financial crisis. The regulatory infrastructure put in place post-crisis has undoubtedly made the banking industry sounder. Fed Chairman Jerome Powell recently testified before Congress that the deregulatory bill being considered will not impact that soundness.

Q: In your view, what kind of political developments will have effects on markets?
We are keeping our eyes on the results of the increase in trade-related actions and the November midterms. The recent announcement on tariffs raises concerns of a trade war and presents a potentially significant headwind for the economy. The market may grow nervous over a potential changeover in the House and or Senate majorities, but it could also sow optimism on the ability to see a breakthrough on other legislative priorities.



HMDA Trends To Watch That Could Prevent Fines

There were one million fewer mortgages originated in 2017 compared to 2016, according to new Home Mortgage Disclosure Act data released by the Federal Financial Institution Examination Council and Consumer Financial Protection Bureau.

The annual HMDA data is traditionally released in September for the previous year. But this year, the FFIEC and CFPB released “snapshot-level” data on 2017 originations to make the information available to the public sooner, and will update the data as needed later in the year.

The 2017 HMDA data tracked information on 12.1 million home loan applications, which resulted in 7.3 million loan originations, 2.1 million in purchased loans, and a total of over 14.1 million actions, according to the FFIEC. The data also includes information on about 481,000 preapproval requests for purchase mortgages.

Notably, for 2017, the volume of reporting institutions dropped 13% to 5,852 institutions compared to the previous year. This was most likely driven by changes to Regulation C, which altered guidelines on which depository institutions were required to report.

Also prevalent in the data were insights on borrowers of different racial backgrounds. Both purchase and refinance loans made to black borrowers grew in 2017, while refinance mortgages for Asian borrowers fell 1.5 percentage points. However, minorities saw greater denial rates overall for conventional home purchase loans.

By product type, the share of Federal Housing Administration loans for home purchases plummeted, part of an overall decline in the government-mortgage share of purchase volume.

From falling originations to market share shifts for nonbanks and government loans, here’s a look at eight key findings from the new HMDA dataset.


Are Banking Regulations About to Ease ?

A Senate bill with bipartisan support would significantly ease the regulatory burden placed on banks by Dodd-Frank legislation passed during the Obama administration following the 2008 financial crisis, The Washington Post reports.

The bill, which is favored by Republicans but also has more than a dozen Democratic supporters, aims to provide relief to midsize and regional banks. The bill’s supporters say Dodd-Frank unfairly lumps smaller banks in with the largest financial institutions, making it difficult or impossible for them to survive.

What is Dodd-Frank?

The Dodd-Frank Wall Street Reform and Consumer Protection Act, named after former Sen. Christopher Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), serves two purposes: Regulate the financial industry to prevent major collapses like the one in 2008, and protect consumers from abusive lending practices.

The 2008 financial crisis occurred largely due to risky investments that started at the local level and got sold up the chain.

Local mortgage brokers offered subprime home loans to consumers at high-risk of default, and those loans were sold to larger firms and subsequently bundled in bonds and sold worldwide.

When large numbers of homeowners defaulted, the bonds, and other assets based on the bonds, collapsed.

Dodd-Frank made it more difficult for banks to use these unstable financial products by increasing supervision and making mortgage lending rules more strict, created the Consumer Financial Protection Bureau to protect borrowers, and created a system for the orderly dissolution of a large failed financial company.

Why would that be rolled back?

Some feel that Dodd-Frank was an overreaction to the financial crisis, and that the resulting regulations have crippled small- and mid-size financial institutions, punishing them for the mistakes of Wall Street.

Sen. Jon Tester (D-Mont.) said the regulations have caused banks in his state to go out of business, and said this bill helps out midsize and regional banks without letting Wall Street off the hook.

“The Main Street banks, community banks and credit unions didn’t create the crisis in 2008, and they were getting heavily regulated,” Tester said according to The Washington Post. “There’s not one thing in this bill that gives Wall Street a break.”

What would the bill do?

The bill would exempt financial companies with assets between $50 billion and $250 billion from the Federal Reserve scrutiny mandated by Dodd-Frank. Only banks with more than $250 billion in assets, of which there are fewer than 10, would receive the highest level of regulatory scrutiny.

What’s the argument against this bill?

Critics say that Dodd-Frank has been successful in preventing financial crises, and that even partial repeals of the law carelessly increase the risk that another collapse could take place.

“On the 10th anniversary of an enormous financial crash, Congress should not be passing laws to roll back regulations on Wall Street banks,” Sen. Elizabeth Warren (D. Mass.) said. “The bill permits about 25 of the 40 largest banks in America to escape heightened scrutiny and to be regulated as if they were tiny little community banks that could have no impact on the economy.”

What are the chances of the bill passing?

The bill has a good chance of getting the necessary 60 votes in the Senate because of the significant Democratic support.

The House has passed a bill already that would roll back Dodd-Frank even further. But, Senate Democrats have expressed resistance to significant changes to the Senate bill, which could make reconciliation with the House bill more difficult.

Say Goodbye to Bank Branches

As Yogi Berra famously pointed out, “It’s tough to make predictions, especially about the future.” Nevertheless, based on my interactions with clients over the last 12 months, here are some best guesses about what executives in the retail and commercial banking industry will be thinking and talking about in 2018. I will undoubtedly be proven wrong about what will matter, and I hope you find plenty to disagree with. So, presented in no particular order, here are 10 trends to keep an eye on in 2018.

Open banking goes mainstream

The wave is starting in Europe, where new regulations, such as PSD2, are forcing European banks to open certain banking services to third parties. In other markets, like the U.S., a move toward open banking is coming from fragmentation of the traditional vertically-integrated bank value chain. Open banking allows customers to share access to their financial data with non-bank third parties, so that those companies can then create apps and services to give customers a better banking experience. This will be the year in which attitudes to open banking start to separate those who want to differentiate themselves by being good trading partners from those still hunkering down behind trade barriers seeking to harvest diminishing profits from old business models.

Put it in the cloud

Twenty-five years ago, banks were debating whether it was safe to execute electronic transactions over the nascent internet or if they should instead build their own proprietary networks. Twenty-five years from now, the current debate about the safety of using the public cloud for banking will seem similarly quaint. There is already plenty of evidence that the cloud can be as secure as any private data center, and current predictions are that by 2020, more computing power will be deployed in the cloud than in all private data centers. In 2018, the conversation around cloud will shift from “if” to “how and when.”

Fewer heart transplants, more bypasses

Traditional mainframe core banking applications are not well suited to the digital economy. The world of overnight batch processing and 4 p.m. transaction cutoffs sits uncomfortably with customers’ expectation of real-time banking. But ripping out and replacing decades-old technology can be an expensive and risky option, especially in light of the promise of blockchain as a medium-term replacement for traditional books and records. Instead, look for banks to “freeze and wrap” — using existing core systems as books of record, while moving customer engagement and analytics to the cloud.

Become truly digital or get out

Customers today expect to be able to sign up for new banking services online. With the advent of the Aadhar digital ID system in India, it can be easier to open a bank account in New Delhi than in New York. Smart, forward-looking banks are now incorporating advanced authentication into their digital apps, while the laggards still ask you to come into a branch to sign a piece of paper. The evidence in the U.S. is that smaller banks are losing market share to the big players because they are struggling to deliver an end-to-end digital customer experience. In 2018, a failure to provide true digital origination will start to move from a disappointment to an existential threat.

Man or machine?

One of the biggest threats banks will face in the next year is synthetic identity fraud. This kind of fraud differs from traditional identity theft in that the perpetrator creates a new identity rather than stealing an existing one. Online deposit and loan origination allows these fake people to open digital accounts that pass all of the usual security checks. It’s a phantom crime that is costing banks billions of dollars and countless hours as they chase down people who don’t even exist. In 2018, banks will need to get better at sorting the real customers from the fake, without undermining the benefits of a great digital customer experience.

Digital first will mean fewer bank branches

Just as travel agencies are quickly becoming a thing of the past, digital banking will continue to shrink the number of global bank branches by 4% to 5% per year. Why bank in person when you can do it online? Scandinavia has already seen half of its bank branches close in the last 5 years. Bank branches won’t disappear completely like Blockbuster video stores, as customers will still need to visit physical stores for complicated transactions and to make complaints face-to-face. But counter transactions are disappearing quickly. The challenge now is to try and get to that right mix of branches and digital offerings as quickly as possible. That means the sound of the shutters coming down permanently may become deafening in 2018.

Fintechs are friends

Despite the tens of billions of dollars of VC money piling into the fintech sector over the last 5 years, the meteor strike that was going to wipe out the banking dinosaurs hasn’t happened. Instead, fintech has lit an innovation flame under the incumbent banks and accelerated their evolution. 2018 will likely see more fintech acquisitions as large players buy rather than build. More broadly, bank innovation will have more of a business-as-usual feel, as banking startups find ways to play well with established players. While the dinosaurs will remain dominant in 2018, in 2019 and beyond, big tech beasts may appear and present more of an extinction threat to the banks. But in 2018, these super-predators will likely still be just sharpening their claws.


CFPB is Making It Easier to Sue Banks ?

The Consumer Financial Protection Bureau just made it easier for ordinary citizens to sue banks by restricting how they can use mandatory arbitration to block class-action lawsuits, according to Bloomberg. But the decision – inspired by a 2015 investigative series in the New York Times about how US companies, particularly credit card companies and payday lenders, abuse the practice – likely won’t stay on the books for long. As the LA Times writes:

It’s all but certain that Republican lawmakers in control of the House and Senate will move quickly to overturn the rule as part of their ongoing efforts to cripple the consumer-watchdog agency and create a more business-friendly regulatory landscape.”


Clauses requiring arbitration to settle disputes are inserted routinely in contracts for credit cards, payday loans and other financial products. They typically prevent consumers from filing lawsuits or banding together in class actions.

“Arbitration clauses in contracts for products like bank accounts and credit cards make it nearly impossible for people to take companies to court when things go wrong,” CFPB Director Richard Cordray said in a statement.

“These clauses allow companies to avoid accountability by blocking group lawsuits and forcing people to go it alone or give up. Our new rule will stop companies from sidestepping the courts and ensure that people who are harmed together can take action together.”

From the time they formally receive the ruling, lawmakers have 60 legislative days to overturn the bureau’s decision. Republicans have been using the Congressional Review Act, a little-known provision, to undo more than a dozen Obama-era regulations during the closing days of his presidency, including the CFPB’s plans to implement tougher standards for prepaid debit cards.

“As a matter of principle, policy and process, this anti-consumer rule should be thoroughly rejected by Congress,” Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee, said in a statement.

Congress isn’t the only body that’s skeptical of the ruling: In an unusual move, the head of a key banking regulator wrote to Cordray to raise concerns about it. Keith Noreika, the acting Comptroller of the Currency, asked that the CFPB share data used to develop its arbitration rule, according to a letter dated Monday that was obtained by Bloomberg.

“We would like to work with you and your staff to address the potential safety and soundness implications of the CFPB’s arbitration proposal,” Noreika said in the letter. “That is why I am requesting the CFPB share its data.”

Noreika cited a section of the Dodd-Frank Act that gives the Financial Stability Oversight Council – a panel of regulators headed by the Treasury secretary – power to set aside any CFPB rule that can be shown to put the safety of the wider financial system at risk.

However, studying the fairness of arbitration clauses appears to be well within the bureau’s remit: Dodd-Frank says the CFPB “may prohibit or impose conditions or limitations on the use” of arbitration clauses if it determines that restricting such provisions “is in the public interest and for the protection of consumers,” according to the LA Times.

During its study, the CFPB found that hundreds of millions of contracts include arbitration provisions and that companies have used the clauses to keep fights out of court almost two-thirds of the time. Very few consumers even consider bringing individual actions against financial-service providers in court or in arbitration.

Despite the rule’s near-certain erasure, Christine Hines, legislative director for the National Assn. of Consumer Advocates, told the LA Times that the CFPB isn’t thumbing its nose at Republican lawmakers who have insisted for years that the agency is a rabid regulatory pit bull in need of either a very short leash or a trip to a farm.

“The agency has to continue doing its job,” she said, “even though there are very anti-consumer people in power.”

Other consumer advocates echoed that sentiment.

“The rule will help to combat the culture of companies profiting from charging illegal fees and committing other crimes against their customers,” said Rohit Chopra, senior fellow at the Consumer Federation of America.

Said Lisa Donner, executive director of Americans for Financial Reform: “The consumer agency’s rule will stop Wall Street and predatory lenders from ripping people off with impunity, and make markets fairer and safer for ordinary Americans.”

The new rule will cover new agreements for products such as credit cards, auto loans, credit reports and even mobile phone services that provide third-party billing. Companies can still include arbitration clauses in contracts, but they must state that those can’t be used to stop individual consumers from joining class-action cases.

According to Bloomberg, it is also possible that industry groups will sue to overturn the CFPB rule. Groups including the US Chamber of Commerce have said arbitration is a valuable tool to prevent frivolous, expensive lawsuits that often don’t do much to benefit borrowers. Meanwhile, consumer advocates say restricting arbitration clauses will deter bad actors and force companies to reconsider certain activities because consumers will be more inclined to sue.



Considering an SBA Loan Program

Entrepreneurs and small businesses are a vital part of the U.S. economy. The nation’s 28 million small businesses account for 54 percent of all domestic sales, provide 55 percent of all jobs and have added 8 million jobs to the economy since 1990, according to the U.S. Small Business Administration (SBA).

It’s no coincidence this growth has occurred in tandem with an increase in the accessibility and range of SBA loan programs. Why should commercial mortgage brokers care? Because SBA loans provide a unique opportunity for brokers to expand their offerings beyond conventional mortgage loans.

With an SBA loan option for their clients, mortgage brokers can offer businesses access to the same type of long-term, fixed-rate financing enjoyed by larger companies. Interest rates are equivalent to favorable bond-market rates and are backed by an SBA loan guarantee.

Each SBA loan program is structured under government-directed guidelines to include maximum loan amounts and interest rates, guarantee fees, use of proceeds, eligibility criteria and more. Matching clients to the right program requires a deep understanding of these intricacies.

Plus, SBA requirements are constantly changing. Brokers need to be plugged in to keep up, so the support of a team of SBA loan specialists is a critical first stage of client engagement.

What are SBA loans?

SBA loans are long-term, low-interest loans tailored to small businesses, the definitions of which vary widely among industries. Small-business loans also are backed by a government guarantee, alleviating risk for lenders and opening doors to financing for businesses that have struggled to get a traditional loan.

“ SBA loan programs have capped interest rates and offer lower downpayments, making upfront costs more affordable. ”

SBA loan programs have capped interest rates and offer lower downpayments, making upfront costs more affordable. They also feature longer repayment terms, which reduces monthly payments. The programs include refinancing options to reduce debt and release cash flow; programs for providing easier access to credit for so-called “high-risk” industries like construction, gas stations and home-based businesses; and programs that help free up capital for real estate investments.

The SBA 7(a) program, for example, with loans up to $5 million and fees as low as zero percent, can be used to purchase real estate or equipment — including the cost of construction or renovation — purchase an existing business, or to refinance debt.

Certified Development Company (CDC)/504 loans are ideal for businesses looking to expand through investments in land or buildings — but not speculation or investments in rental real estate. The CDC/504 loan provides long-term, fixed-rate financing up to $5.5 million. Soft costs like architectural and legal fees also can be rolled into the loan. Downpayments as low as 10 percent are a big attraction of this program, because banks often require 20 to 30 percent of the purchase price. That downpayment is based on total project costs in most cases, which includes renovations and soft costs. That allows a business to preserve cash for working capital.

Advantages for mortgage lenders include lower risk, because the SBA guarantees the loan; a lower loan-to-value (LTV) ratio; Community Reinvestment Act credits; and being able to offer another option for keeping growing, small-business clients happy. Essentially, SBA loans offer a valuable financing option that enables brokers to expand offerings to eligible businesses beyond their current purview by teaming with an SBA lending partner.

Work with the right lender

It’s important to understand that the SBA lending landscape is not equal. To service small businesses more efficiently, the SBA has three categories of lender programs – General Partner (GP), Certified Lender Partner (CLP) and Preferred Lender Partner (PLP).

PLP status is the most desirable accreditation that an institution can receive because it gives the lender the authority to make the final credit decision, simplifying and expediting the loan-approval process for all parties. Nonpreferred lenders must submit loans to the SBA for approval, a process that can take several weeks, delaying approvals and yields.

 Key Points

Questions to ask before expanding into SBA loan programs

SBA loans are a valuable resource for commercial mortgage brokers seeking to expand their base, reduce risk and offer clients alternatives to conventional mortgages. But to participate fully and successfully, brokers must understand the market well and partner with an accredited SBA loan expert. If you’re considering adding SBA loan programs to your brokerage service, consider the following:

  • Does your brokerage have a full understanding of the intricacies of the SBA lending market, so you can determine which loan will work best for your borrowers?
  • Is your team familiar with the complexities of the SBA loan-application process and the precise requirements needed to ensure a successful application?
  • Could you act as an effective middleman to guide and inform your clients as they proceed through the underwriting and post-closing reviews?
  • Do your referral options include SBA-accredited banks that have the skills and expert staff to service and report on these loans in accordance with SBA guidelines (1502 reporting)?
  • Does your lending partner have sufficient back-office capacity and know-how to support SBA lending requirements?

Achieving PLP status requires lenders to have in-house staff expertise and a track record of success in the processing and servicing of SBA loans. To ensure a successful SBA loan application for your client, it’s recommended that mortgage brokers work with an SBA lender that has PLP status.

SBA loans offer many unique opportunities for lenders and brokers alike, but can be complex, and require significant resources and expertise. Here’s a breakdown of the process:

  • Loan application and underwriting. Applying for, structuring and underwriting SBA loans is a multifaceted process handled by a lender, not the SBA. The lender must determine a borrower’s eligibility, complete a credit analysis and package paperwork, all in accordance with SBA requirements. Brokers should work with lenders that have clear policies on credit parameters and what defines an “acceptable” loan.
  • Staffing and skill sets. To participate fully and successfully in SBA financing, lenders and brokers must understand the market well by investing in training and specialized staff, as well as integrating new risk and compliance protocols to ensure they meet government requirements. Small businesses are encouraged to seek out lenders with a solid track record of processing SBA loans. Again, this makes it critical for brokers to work with an SBA lender, preferably one with PLP status.
  • Loan servicing. Once the SBA approves a loan, lenders must administer it in accordance with federal guidelines and regulations. Complex standard operating procedures (SOPs) govern the 7(a) and CDC/504 programs. If a lender fails to demonstrate continued ability to evaluate, process, close, disburse, service and liquidate small-business loans, the SBA may refuse or revoke its SBA lending status.

Real estate red flags

Even with the right SBA partner, there are several proactive steps that mortgage brokers can take to ensure a winning SBA loan application and bring additional value to their client relationships.

Appraisals can trip up any real estate deal. With construction costs rising each year and the potential for material costs to change during the approval process, financial projections can easily go awry. Work with a good appraiser or get multiple appraisals to ensure you’re reflecting the big-picture financials.

Another surprise that can ruin any deal is an environmental issue, such as mold, radon or other land contaminants, as well as a failure to comply with applicable environmental laws. Work with an environmental consultant to identify and manage these problems before they derail your client’s property transfer or financing transaction.

Whether a client is looking to buy an existing facility or construct a larger facility, it’s likely they already have business debt tied up in existing assets. Rather than increase their debt or hurt their chances of being approved for a loan, become knowledgeable about how SBA refinancing options can consolidate existing debt. Work with your client to understand their debt and how they can save money through refinancing.

• • •

Partnering with an SBA lender is an essential step in not only ensuring your clients are matched with the right loan, but that the loan has the best chance of being approved by the SBA and serviced in accordance with SBA requirements. Sending along a loan referral also can pay dividends in terms of your client relationship and the added bonus of a nice referral fee. •



Small Banks Competing with Big Data Mining

When you talk to Jeffery Lee, it’s hard not to hear how excited the chief marketing officer of Seacoast National Bank is about the power of big data. The same goes for Robert Stillwell, the head of analytics at the $4.7 billion asset bank based in Stuart, Florida. With a small handful of colleagues in Seacoast’s marketing department, Lee and Stillwell have combined data analytics and marketing automation software to gain insights into their customers and run dozens of targeted marketing campaigns that, in some cases, generate returns on investment in excess of 100 percent.

Seacoast proves that a bank doesn’t have to be big to benefit from big data. In Lee’s estimation, in fact, just the opposite is true. “Our size is an advantage because our data isn’t trapped in a bunch of different silos,” says Lee. “We have one core banking provider, everything flows through it, and the data is readily available.” This eliminates the technical challenge of wrangling data from disparate sources. It also means that Seacoast “doesn’t have to fight battles about who owns which data,” explains Lee.

The chief information officer of Memphis, Tennessee-based First Horizon National Corp., the holding company for First Tennessee Bank, says the same thing. “This may be an advantage of smaller institutions,” says Bruce Livesay. “Because our environment is less complex, we can use a single tool across all of our channels. And it’s easier for us to do that than the big guys,” he continues, referring to the $29 billion asset bank’s data-driven marketing platform.

Of 13 global and regional banks surveyed by consulting firm McKinsey & Co. recently, almost every one listed advanced analytics among its top five priorities, with many investing heavily in it already. Yet, the expected results haven’t materialized. The problem is that these “efforts remain unconnected and subscale; they have not yet tied together their disparate efforts into a single, unified business discipline.”

Costs no longer serve as an impediment either, even for banks without hundreds of billions of dollars in assets. “The cost of software is unbelievably attainable. I had no idea it had dropped that much,” says Lee, who worked for a major credit card company before joining Seacoast in 2013. This includes the bank’s marketing automation platform as well as its analytics software.

“Because the [cost of] technology required to gather and store relevant data has gone down, it is no longer cost prohibitive for small and midsized financial institutions to get into big data analytics,” says David Macdonald, vice president of financial services at SAS, a leading company in business analytics software and services. Livesay agrees. While he wouldn’t disclose how much First Tennessee’s data-driven marketing automation platform from IBM costs, he made it clear that it “more than pays for itself.”

A direct mail campaign conducted by Seacoast over the past year offers a case in point. By analyzing branch visits, the bank identified customers who frequented branches to deposit checks instead of using mobile deposit. To encourage these customers to switch, Seacoast sent checks for nominal amounts to them with instructions on mobile deposit. Seven percent responded by permanently changing their behavior. That’s seven times the conversion rate one would ordinarily expect from a campaign that isn’t informed by advanced analytics, says Lee.

But if scale and cost aren’t impediments, what’s keeping smaller banks from taking better advantage of their data?

The answer is: Talent. Seacoast hired Stillwell, who had been using data analytics software for 15 years when he joined the bank in 2014. Like Lee, Stillwell came from the credit card industry, which has a reputation of being especially effective purveyors of data. Stillwell started on a shoe-string budget, with analytics software from SAS that ran on a personal computer. This worked as a proof of concept, giving Stillwell the tools and programming language needed to analyze large amounts of data without requiring a substantial investment. Seacoast then upgraded to a more expensive server-run version a year later.

Stillwell has since gone on to use the software to develop a customer lifetime value model that estimates per-customer profitability—it also specifies why a customer is or isn’t profitable. He built an opportunity-sizing engine, too, which identifies the next best product to sell a customer based on the product’s profitability and the customer’s current product portfolio. The bank is now combining these tools with its marketing automation platform to complete and automate the circle between insights and execution.

Once this happens, Lee believes Seacoast will be able to scale up its highly targeted marketing campaigns from the 40 or so it runs right now to more than 10 times that amount. “Most banks our size are doing one marketing campaign a quarter; we’re doing 40 at all times,” says Lee. “And we could be running 400 campaigns.”

Seacoast’s marketing department is now rolling these tools and insights out to a broader audience at the bank. Stillwell built a user interface atop the analytics platform to enable remote access, and the bank has begun educating frontline employees about how the insights from the data can help serve customers more effectively. It does so by offering insight into the products and services each of Seacoast’s customers would benefit most from, as well as the best channels over which to engage them, explains Lee.

These efforts have been well received, though they have at times run up against long-held assumptions. This is especially true in the context of customer profitability. “You ask someone in the branch who their best customer is, and they say it’s the person who comes in every day,” says Lee. But because it costs a bank more to service these customers compared to those who bank remotely, Seacoast’s profitability model comes to the opposite conclusion. “It’s a big cultural change because there are perceptions that don’t always align with what the data tells you,” says Lee.

First Tennessee saw a similar cultural change after implementing its own customer profitability model. “There’s absolutely no doubt that it’s changed the culture of the company. Most banks can’t give these kinds of insights to their bankers,” says Livesay. “The fact that we can has changed the behavior of our sales people. It prioritizes which customers they should be talking to and informs those conversations.”

At the end of the day, there’s no question that big banks derive many benefits from their massive balance sheets, but there are some areas where scale can be a disadvantage. The timely implementation of a fruitful data analytics program may be one of them.


2018 HMDA Q&A – Get the Facts

“When the HMDA rule was originally enacted in 1975, it required depository and non-depository institutions to collect and report data about mortgage originations. On October 15, 2015, the scope of the rule changed—expanding reporting coverage for non-depository institutions, increasing transactions covered, and increasing data elements to report. The new HMDA rule now requires 48 data points be collected, recorded and reported: 25 are new data points (including total loan costs or total point and fees, automated underwriting system, and open-end line of credit) and 14 are modified from the previous rule.”[1]

Enough said. With this type of expansive change to the HMDA-reporting and -recordkeeping rules, there are bound to be questions. Here’s a sample.

Q: For HMDA recordkeeping and reporting, what’s the story on HELOCs?

A: Beginning January 1, 2018, covered loans under the HMDA rule will include not just closed-end mortgages, but also “open-end lines of credit secured by a dwelling” (i.e., HELOCs). Not every financial institution will be subject to the rule. Institutions that originated at least 25 closed-end mortgages or 100 HELOCs in each of the two preceding calendar years will be required to collect, record, and report HELOC data under HMDA.

Q: We have always relied on the Federal Financial Institutions Examination Council’s software (reporting to the Federal Reserve Board) each year for HMDA reporting. We’ll be able to continue using it, right?

A: There are no changes to the submission process for HMDA data collected by financial institutions in 2016. Financial institutions will file HMDA data with the Federal Reserve Board (FRB) using the FRB’s instructions, file specifications, and edits familiar to HMDA users. Please visit the FFIEC website for resources to help you file.

There is a new data submission process beginning with HMDA data collected by financial institutions in or after 2017. Financial institutions will file HMDA data with the Consumer Financial Protection Bureau (CFPB). The HMDA agencies have agreed that filing HMDA data collected in or after 2017 with the CFPB will be deemed submission to the appropriate Federal agency. You should refer to the FFIEC and the CFPBwebsites for resources to help you file.

Q: What if we need to resubmit HMDA data following the change to the reporting process?

A: There is a new data resubmission process beginning with HMDA data collected by financial institutions in or after 2017. Financial institutions will resubmit HMDA data collected in or after 2017 by filing with the Consumer Financial Protection Bureau (CFPB). Refer to the FFIEC and the CFPB websites for resources to help you file.

Q: We keep the loan application register (LAR) to aggregate data for HMDA reporting? Is there anything we need to know about identifying our loan transactions on the LAR under the new HMDA rules?

A: If your organization originates loans that will be required to be reported on a HMDA Loan Application Register (LAR), you will need to obtain a Legal Entity Identifier, or LEI. This string of 20 characters is used in part to create the 45-character Unique Loan Identifier (ULI) that must be assigned to each loan reported on the LAR. You may obtain your LEI from the Global Market Entity Identifier Utility website at[2]

Have more HMDA recordkeeping and reporting questions? Ask the Compliance Experts, or, use these additional resources:


Around the Industry:

Effective Now:

The time to comply with new HMDA rules is now.

On the Horizon:

FDIC Summer 2017 Consumer News highlights 10 popular scams plaguing customers. How do they compare to your risk management?


How are you recapturing EPO or EPD fees? How might it affect your loan officer compensation practices? See this for more.

[1] Wu, B. (2017, June). Keep Calm and Compliance On. Mortgage Compliance Magazine, pp 40-43.

[2] Kilka, L. (2017, June). The Roadmap to HMDA Implementation. Mortgage Compliance Magazine, pp 36-39.


Why are Small Banks Disappearing ?

n 1994, nearly 500 banks were headquartered in California. Today, there are fewer than 180. By the end of the year, if current trends hold, Californians will have only one-third the number of banks to choose from for their mortgage, small business and personal savings needs than they did just a couple of decades ago.

There are a few reasons for this disturbing trend, which is happening across the country. But the most important one — the reason I hear more than any other from bankers who decide to merge, sell or close their institution — is the increasing federal regulatory burden.

That doesn’t mean I oppose all regulation. In the wake of the financial crisis, regulatory changes were necessary, and provisions in the Dodd-Frank Act passed in 2010 helped improve financial stability. But nearly a decade after the crisis, we’ve ended up with too many duplicative and sometimes contradictory rules that don’t always promote safety and soundness, and may actually hinder banks from serving their customers and growing local economies.

For example, I recently heard from a bank in Southern California that, to its great regret, had to end its mortgage loan program. Dodd-Frank’s mortgage regulations and disclosures meant the bank would have to purchase expensive software to manage the new layers of red tape — so expensive, in fact, that the bank was going to lose money on every single loan.

Getting community banks out of the business of helping qualified Americans buy homes can’t have been what Congress intended when it passed Dodd-Frank. It makes sense to recalibrate some elements of that law to ensure that it’s working properly.

A proposal in the House would take important steps in that direction. The Financial CHOICE Act, which the Financial Services Committee recently voted to send to the floor, includes several sensible provisions that the banking industry endorses, as well as others that require further study and analysis.

Among the measures I support: The legislation would allow regulators to tailor their oversight to the unique risk profiles of individual financial institutions; provide greater opportunities for banks to appeal decisions by their examiners; and ease some requirements on mortgages that banks hold in their own portfolios (meaning they retain all the risk). The overall effect of these and other provisions would be to give banks more breathing space and consumers more choices.

Though banks adjust as best they can for the sake of their customers, the smallest banks have too few assets to keep up with ever growing compliance costs. Indeed, the vast majority of banks that have disappeared are community banks. At the end of 2016, California had just 11 small banks left; in 1994, these banks accounted for nearly half of the industry in the Golden State.

Some have pointed to strong bank profits as an argument for why reform is unnecessary. Profitability is, of course, a sign of economic strength that we should celebrate; profitable banks benefit their customers, investors, employees and broader communities.

However, the topline profit figure doesn’t tell the whole story. Increased regulatory compliance costs limit bankers’ ability to reach underserved communities. Moreover, tunnel vision on bank profits ignores macro-level trends.

Since Dodd-Frank was passed, just four new banks have formed nationwide. (The newest, I’m pleased to report, is in Orange County.) This abysmal pace of startups is principally due to the extraordinary regulatory burden placed on small banks and the excessive sums of capital new-bank investors are required to put up.

Our economy performs best with a healthy and diverse mix of banks to meet customers’ needs — large, small and everywhere in between. Without reasonable reform in Washington, California’s banking sector will continue to shrink and become less diverse. Californians — and all Americans — will pay the price in terms of lost opportunities for growth.

Depositors Biggest Complaints With Their Banking

As a new report from reveals, complaints filed against the six most popular banking services — bank accounts, consumer loans, credit cards, credit reporting, mortgages and student loans — have been steadily climbing over the past five years.

Last year was particularly tough for the bank-client relationship: Nearly all six services saw more complaints in 2016 than in any other year since 2012.

Most consumers are griping about mortgages. Of the 722,684 complaints made to financial institutions in 2016, more than 30 percent of them were regarding those particular loans.

“It could be that some banks have recognized this kind of loan may not be good for business,” explains. “In a memo to shareholders, JPMorgan CEO Jamie Dimon outlined that mortgages are offered as a benefit to customers, not because it’s a sound investment for the bank.” And since mortgage lending is not necessarily “good for business,” banks may be less motivated to accommodate consumers, which could explain the high number of complaints.

After mortgages, debt collection accounted for 18.7 percent of complaints filed and credit reporting accounted for 17.9 percent.

As for the recent rise of complaints overall, offers one possible explanation: “In a quest for higher profits, many [banks] have looked to acquire other banks and reduce or limit services to meet their investors’ needs.”


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