Category Archives: AdviceOnLoan

Recently SBA published its monthly “Lending Statistics for Major Programs” as of February 29th, already marking the end of a full five months of FY 2016 loan approval volume. This report provides rolling year-over-year loan approval statistics for the 7(a) and CDC/504 loan programs broken down by the respective categories of policy-targeted penetration.

The 7(a) program continued to progress into FY 2016 with a robust showing of total loan approvals of $8.63 billion, a jump in excess of 6% over the same period at 02/28/15 ($8.1 billion). Even more stark is to compare this volume to FY 2014, which began with a 17-day federal government shutdown. This year’s volume is more than 32 percent ahead of the YTD loan totals recorded that year ($6.51 billion), although leveling off from what the first 120 days of this FY were comparatively.

The number of approved 7(a) loans was 23,725 through the first five months, about six percent ahead of the number in YTD FY 2015, and 34 percent ahead the same period in FY 2014. And interesting that the YTD average loan size is $363,729, practically the same as it was last year.

A graphical illustration of all SBA monthly loan approvals is found at Capital Views.

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The ubiquitous FICO score issued by the Fair Isaac Corporation, which uses predictive analytics to help lenders take credit-related decisions, is increasingly getting replaced by VantageScore, a product developed by the three major credit reporting bureaus, Experian, TransUnion and Equifax. According to a report in NerdWallet, last year VantageScores were used by 2000 lenders and seven of the 10 largest U.S. banks.

While both the FICO score and the latest version of the VantageScore work on a 300-850 scale, there are certain differences in the data they use. FICO 8, the most widely used version, looks at data for the last six months. VantageScore, on the other hand, examines data stretching back to two years.

Paid collection accounts is another area where the two scores adopt a divergent approach. VantageScore 3.0 does not consider these at all while calculating the credit risk of a prospective borrower. Most versions of the FICO score can be affected by the presence of a paid collection amount.

The newer FICO 9, launched in fall 2014, has been tweaked to disregard paid collection amounts when calculating a credit score. In previous versions, both paid and unpaid collection amounts influenced the FICO score in a similar manner with the only departure from this rule being that FICO 8 ignored collection amounts less than $100.

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The commercial property market, which enjoyed six years of steadily increasing prices saw a drop in January for the first time since 2010. The Moody/RCA Commercial Property Price Index fell 0.3% from the previous month, led by decreases in office and industrial buildings, each of which shed over 1%.

The index, which was at its nadir in 2010, has almost doubled since then and is currently about 17% above its previous peak. Prices for office buildings in major cities including New York and San Francisco have seen a tripling in prices since the market hit its lowest point.

But the trend of rising prices has halted and according to Morgan Stanley analysts, commercial real estate rates would not see any appreciation in 2016. Till recently, investors had steadily pushed up the prices of office buildings, hotels and shopping malls, attracted by the higher yields of these commercial real estate assets.

Now banks have lowered the loan-to-value ratio they offer on commercial real estate resulting in investors finding this asset-class less attractive. According to Morgan Stanley analysts, “We recognize the very important role that the lending markets have played in the recovery of CRE prices. Indeed, our analysis shows that a 10 percentage point decline in the loan-to-value ratio (from 70% to 60%) requires 2.25% annual net operating income growth to offset the lower leverage.”

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Last year, American Express and Costco ended their 16-year old co-branded card affiliation after the retail warehouse giant decided to switch over to Citigroup and Visa. According to a report in PYMNTS.com, 8% of the bank’s worldwide annual spend came through Costco in 2014 and the Costco-American Express co-branded card made up 20% of AmEx’s outstanding loans.

Costco’s move to Citigroup was probably prompted by the reported 0.6% of each card transaction that the retailer paid to American Express. A story in the Seattle Times states that the retailer will pay Visa and Citigroup “near-zero expenses” in sharp contrast to its arrangement with AmEx.

In a move aimed at replacing these volumes, American Express has said that it will concentrate on small business loans and cards with features specifically designed to help firms make the purchases necessary to run their operations.

AmEx is already active in the small business area and in 2014 funded $190 billion in purchases through its cards to enterprises in this sector, up from $122 billion in 2010. Now, the bank has entered into an arrangement with Fundera, an online marketplace for small businesses seeking finance, to promote its charge cards.  Read More

In a recent speech, Neel Kashkari, the new president and chief executive officer of the Federal Reserve Bank of Minneapolis, questioned whether the steps taken after the 2008 financial crisis have adequately addressed the issue of too big to fail (TBTF) banks. According to him, much more needs to be done to reduce the risk that these large organizations pose to the financial system and to the economy.

While Kashkari acknowledges that a beginning has been made by regulators, he says that there is a need to give serious consideration to a number of other options if the threat of TBTF is to be ended altogether.

Among the measures that can be taken, the most direct one is to break up large banks into smaller, less connected entities. But this step faces strong opposition with existing banks arguing that large multinational corporations need to have a single banker that they can rely upon for their business around the globe. Countering this argument, Kashkari says, “But these corporations manage thousands of suppliers around the world – can’t they manage a few more banking relationships?”

Advocates for large banks also say that the economies of scale that these institutions enjoy give them a major advantage, which in turn, helps customers, as a part of the savings that banks are able to make are passed on. But this benefit to customers cannot be at the cost of the potential damage to the economy in the event of a widespread economic collapse.

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While negative interest rates on borrowings seem counter-intuitive, they have been in existence for some time and in fact, are gaining greater acceptance among central banks in the developed world. Switzerland’s negative rate is 0.75%, Denmark has a negative rate of 0.65% and Japan has recently cut its rate to a negative 0.1%.

If negative rates on short-term borrowings are a cause for surprise, then paying for the privilege of lending for longer periods should be even more perplexing. But as reported in the Washington Post, the 10-year rate in both Switzerland and Japan is also below zero.

Across the world, government bonds of a total value exceeding $7 trillion now yield rates below zero, making up about 29% of the Bloomberg Global Developed Sovereign Bond Index. BloombergBusiness states that this amount is set to grow as Japan’s 10-year yield has entered negative territory for the first time.

The noted economist Paul Krugman points out that it is a fallacy to think that if interest rates go below zero, people would prefer to hold currency rather than put money in the bank. Storing a large amount of cash involves a cost and as long as the rate being charged by the bank is less than this, it would make sense to make a deposit which carries an interest rate less than zero.

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The ultimate success of a bank or a commercial lender is dependent to a great extent on how well it manages credit risk, which in turn is strongly influenced by the presence of two distinct features that determine how well it does on this count.

First, the financial institution’s leadership should be seen to be strong advocates of a robust credit culture that promotes a balance between the need to grow the business and to manage risk in a manner that is in sync with the lender’s overall strategic goals.

Second, staff in the various departments of the lending institution must be trained to develop the skills and capabilities that will allow them to fulfil their roles in a manner that enables the lender to meet its goals.

An organization that pays only lip service to risk management principles is setting itself up for failure in the long-term. Similarly, lenders need to implement a structured program that ensures that every employee across business development, credit and operations is trained to play a role that allows the organization to grow without compromising on the quality of its loan portfolio.

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The Equipment Leasing & Finance Foundation’s (ELFA) Monthly Confidence Index fell to 48.3 in February from a level of 54 in the previous month. The number of respondents who believe that demand for leases and loans to fund capital expenditure in the next four months will fall has risen to 35.5%, up from 17.9% in January.

Reflecting the gloom in the sector, 25.8% of executives said that they expect business conditions to worsen in the period from March to June. Last month only 10.7% of those polled held a negative view.

The Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) is based on the views of 50 senior executives from industry and a wide cross section of large-ticket, middle market and small-ticket banks. As the same organizations provide data from month to month, the results of the survey display a consistent reflection of the industry’s confidence level.

Voicing the equipment finance sector’s fears about the future, William H. Besgen, Vice Chairman Board of Directors, Hitachi Capital America Corp. said, “Targeted business volumes seem to be holding up in all our business segments, but the big question is what will the impact of lower oil prices and the apparent negative sentiment created in the energy and banking community do to slow the rest of the economy?”

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Labor Department data for January revealed that the unemployment rate fell to 4.9% as nonfarm payrolls rose a seasonally adjusted 151,000. This is the first instance of the unemployment rate falling below 5% since February 2008. While the number of jobs added was below the consensus figure of 190,000, the three-month rolling average still stands at a healthy 231,000, a figure that indicates that the job market is still robust.

More than half of the jobs in the country are in the small business sector where the hiring trend continues to remain positive with firms that have under 50 workers adding staff at a rate of 2.2% over the last three years. This contrasts with the growth of employment in America’s biggest companies where headcount has been rising at a comparatively lower 1.9%.

According to a report carried in the Wall Street Journal, economists are of the view that the likelihood of the country slipping into a recession is the highest that it has been at in the last three years. This opinion is prompted by falling industrial production and company profits. But this is not the signal emanating from small businesses across the country.

Data with payroll processor Automatic Data Processing Inc., and the National Federation of Independent Businesses shows that small firms are continuing to add to their payroll count. This is an indication that a recession may not be around the corner. Jessica Helfand, an economist at the Bureau of Labor Statistics, explains that small companies and businesses are quick to add workers when they see a chance to increase their business volumes and are also the first to lay off employees when the economy goes into decline.

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In 2014, Facebook executives met with alternative lenders and credit-data agencies to see if the data that it had on its users could be the basis on which lenders could take a credit decision. While these discussions did not go far, the social media giant has secured a patent that enables lenders to predict repayment based on the credit scores of people in the prospective borrower’s network.

A report in the Wall Street Journal states that Facebook did not comment on its plans to use this information. Even if Facebook did want to utilize this data in any way that could influence a lending decision, it would have to tread carefully.

In January, the Federal Trade Commission released a report that indicates that a social network could be subject to regulation as a consumer-reporting agency if its data was used to decide on the creditworthiness of its users. Claire Gartland, a consumer-protection counsel at the Electronic Privacy Information Center, a Washington-based advocacy group says, “There’s a risk of liability if a social network was building a database with credit decisions in mind.”

Kountable, is a San Francisco-based fintech which uses social media data to extend small business loans internationally. It collects information about a prospective borrower’s calls, texts, emails, messages and connections to issue a kScore, based on which it advances financing. The company is active in Africa but has yet to launch operations in the U.S.

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