Time for Consumer Lenders to Come Out From Under the Covers

Based on an informal survey of consumer lenders around the country, no one seems to be lending anymore. Oh they would argue that – they would say they are lending only to qualified borrowers and then begin to cite monthly loan production numbers.

But that’s really not lending. Lending involves identifying risk and if you lend to only the highest quality of borrowers, then you might as well invest that money in low-risk securities and eliminate the operational cost of maintaining a loan portfolio.

Which is what I think is happening to many large consumer lenders. A friend of mine told me last week that he is 4 months away from paying off an installment loan he took out 4 years ago to help finance his son’s college education. He wanted to refinance that loan with the same lender to consolidate debt. Back in the day, provided the applicant had good credit and income capacity, this was a no-brainer:

• The customer had an established loan record with you
• The customer was improving his financial position by consolidating debt
• You were strengthening a customer relationship
• You were increasing your consumer loan portfolio

Nope – the answer he got was that the bank was not making any new loans until further notice citing the “current economic conditions”.

Talk about having it completely backwards! If I was still in the loan business, I would be making a boatload of bill-consolidation loans because this helps borrowers by reducing and managing their debt. (It also builds customer loyalty which once upon a time used to be a big goal). I used to make bill consolidation loans on a bi-weekly basis with payments automatically debited from the borrower’s deposit account with us (there’s that loyalty thing again). Bi- weekly loans actually pay the loans down faster and are quite profitable. Everybody wins.

But alas, financial institutions and regulators have lost their way. It used to be that they would take in deposits and lend money to help people in the community, using the interest they made from loans to pay the bills and make a profit. But that approach involves risk – interest rate risk, credit risk and collateral risk.

No – the fastest way now to make a profit is to increase fees on everything and take the deposits and invest them in securities and other investments – now you only have to manage the interest rate risk and avoid the credit and collateral risk. However, when credit stops flowing people stop buying stuff - businesses stop expanding - and unemployment remains high. The circle of recession goes on and on.

So c’mon guys – start with the average consumer. Help them to consolidate their debt, finance new cars and homes, and start opening credit lines again on credit cards. Start lending again. It’s what you’re supposed to do anyway.

If you need someone to show you how – call me.