In my role as a strategist, I have worked with dozens of banks and credit unions throughout the U.S., helping them develop and implement marketing and retail programs. Over the past three years, virtually every financial institution’s main focus has been: growing their loan portfolio. In 2013, their efforts certainly reaped dividends as loan growth proved effective for financial institutions throughout the industry.
Due to new mortgage financing regulations that took effect in January, financial institutions are not so confident about 2014. These regulations could potentially put banks and credit unions behind the eight ball when it comes to mortgage lending, their credit bread and butter. In fact, many financial institutions are now reconsidering whether they even want to be in the mortgage business anymore.
A key regulation requires financial institutions to ensure borrowers have the “ability to repay” their mortgage loan. The Consumer Financial Protection Bureau (CFPB) has established a 43% debt-to-income threshold. That has banks and credit unions on edge. While ensuring borrowers have the ability to repay their loans is only a good thing, if something were to go wrong, the federal government has amended that repercussions for the lender would be unrewarding, to say the least.
Another regulation grants borrowers the ability to sue lenders within three years of the loan closing if it is determined that the lender improperly documented the borrower’s income or assets or incorrectly calculated the borrower’s financial obligations. This error could cause substantial penalties for vendors, likely up to tens of thousands of dollars.
Compounding all of this is another onus placed upon banks and credit unions. While the CFPB looks to mitigate the risk to borrowers with one hand, it also sets a disparate income trap. Banks and credit unions are subject to stiff penalties if their portfolio of borrowers is deemed by the government to be insufficiently diverse.
While financial institutions are in a quandary over this, many can comply with the letter of the law while still growing their loan portfolios. In order to do this, financial institutions need to put data analytics to use. By identifying “qualified” borrowers, those who show the propensity for a loan along with the capacity to meet the institution’s credit prescreen criteria, financial institutions can take a major step in ensuring that they are directing loans to potential borrowers who possess the capacity to repay these loans. The data to accomplish this has always been at the fingertips of banks of credit unions. Many have neglected to use it. Those days are now over.
A complementary benefit of this approach… deploying business intelligence in order to get the right loan opportunity in front of the right account holder will help to ensure the most efficient spend of a financial institution’s marketing dollars. In the vein of maximum profitability, this is only a good thing.