Consumer lending: Tough competition, niche opportunities

Consumer lending has been gaining steam, particularly among community banks. But nonbank fintechs and credit unions are emerging as more challenging rivals for these borrowers for 2018, especially in mortgage, home equity and auto lending.

By Karen Epper Hoffman

It has been a long and winding road, but consumer loans are finally making a comeback across the board. However, underwriting wariness and amped-up competition from big banks, credit unions and online lenders are making this market more challenging for community banks.

The good news? Small-bank loan growth overall has been outpacing loans at bigger banks through the second quarter of this past year, with community banks reporting $1.5 trillion in loan balances in the second quarter, an increase of $41 billion, or 2.7 percent, from the previous quarter, according to tracking data from the Federal Reserve released in August. Loan balances overall at community banks increased by nearly 8 percent, or $111 billion, over the past year. And, while community banks continue to do well in small-business lending and are picking up the pace in commercial and industrial loan portfolio, consumer lending is becoming a new bright spot.

According to the FDIC Quarterly Banking Update, in all areas of the country, with the exception of the southwestern U.S. (where there was only a minimal decline of 0.1 percent), consumer lending has been on the uptick for community banks with $1 billion to $10 billion in assets. Among these larger community banking lenders, multifamily lending and home equity lending increased by at least 1.5 percent. For community banks on the smaller end of the spectrum, consumer lending has not been as rosy. Multifamily home mortgages decreased 0.8 percent for banks with $100 million to $1 billion in assets, and shrank 1.1 percent for banks with less than $100 million in assets.

“More and more community banks are looking at consumer lending now,” says Robert Kettenmann, president of Darien Rowayton Bank, which has an online lending business that specializes in student loan refinancing. The $660 million-asset bank in Darien, Conn., made more than $3 billion in high-quality consumer loans since the program originated more than four years ago.

“Ultimately, the best thing a community bank has going for it is its relationship with the communities it operates in, so utilizing that to protect market share remains critical.”
—Mike Perito, Keefe, Bruyette & Woods

Based on conversations with his executive peers throughout the industry, Kettenmann says that many community banks are looking to diversify their balance sheets, aware that regulators might be concerned about some banks’ growing concentration in commercial real estate. Indeed, commercial real estate represents 29 percent of community bank loan portfolios, compared with just 4 percent for home equity and 25 percent for residential mortgages, according to the Federal Reserve’s 2017 report, “Community Banking in the 21st Century.”
“Heightened awareness has caused more community banks to really look at consumer lending, but they’re not all necessarily comfortable with it,” Kettenmann says.

Despite its potential opportunities, consumer lending is not without risks. While delinquencies are down in mortgages, home equity loans and bank cards, delinquencies in both direct and indirect auto loans are inching upward, according to the ABA Consumer Credit Delinquency Bulletin released in October 2017. Mike Perito, research analyst at Keefe, Bruyette & Woods, says credit has started to “deteriorate in certain instances, and we have seen several community banks grow at a slower rate due to flat or declining consumer loan balances.” 
Right now, while 83 percent of community banks offer single-family fixed-rate mortgages, 3 percent of those banks say they will soon discontinue offering them. More than 3 percent of the 82 percent of community banks that currently offer small-dollar unsecured loans plan to exit that business. Many community banks simply do not have the bandwidth or the stomach to deal with the growing regulatory strictures, like the recently introduced TILA-RESPA disclosure on mortgages, which has also been slowing down the loan process.

Technology matters
“Community banks find mortgage and consumer lending to be expensive and difficult to process in the current regulatory environment,” says Samir Agarwal, vice president of community bank solutions at Wolters Kluwer. “Community banks need to take advantage of technology solutions to help them achieve economies of scale.”

Indeed, Robert L. Watts, AVP consumer credit administrator for D.L. Evans Bank, a $1.6 billion-asset bank based in Burley, Idaho, considers community banks “a little weak with regards to staying up to date with technology.”

Agarwal agrees, adding that “market opportunities in mortgage lending are likely to continue to decline unless technology can address the gap.” He says that regional banks are picking up this lending because they’ve invested in technology that allows them to receive a higher return.
Nathan Stovall, senior analyst for S&P Global Market Intelligence, points out that consumers have become accustomed to the speed of digital channels available through online-only lenders, credit unions and big banks. “Community banks need to think about ease of use,” says Stovall, adding that credit unions may be outpacing both community banks and nonbank online lenders like Quicken Loans and LendingTree.

Watts says that with the new Home Mortgage Disclosure Act (HMDA) rules and other regulations, “I can see community banks having to focus on channeling resources to meet the regulatory burden, as opposed to offering more up-to-date products that new customers are seeking. Community banks will need to determine what is most important not only to them as an institution but also to their customers.”

Perito predicts competition on the consumer side will “remain pretty elevated for community banks, although at this point, we don’t believe credit should deteriorate too much more in 2018, even despite our assumptions around interest rates only moving up modestly.” Perito believes certain banks could likely see some opportunity in auto lending, as others have pulled back. “Overall HELOC [home equity line of credit] activity at the largest banks has been shrinking for years now, so there should still be opportunities for community banks to grow HELOCs,” he adds. “Focusing on more niche product types, such as RV and motorcycle, which don’t typically see [as much competition], could also be a nice outlet for community banks to find lending opportunities within their credit parameters.

“Ultimately, the best thing a community bank has going for it is its relationship with the communities it operates in, so utilizing that to protect market share remains critical as community banks continue to look to grow their asset base.”

Karen Epper Hoffman is a writer in Washington state.