Balancing the Needs and Challenges of a Market in Decline

By Serena Lynn, Editor, CCH Federal Banking Law Reporter.

With the credit crisis deepening, it is important for financial institutions to understand the differences between subprime and underbanked customers and recognize the potential underbanked customers still have as safe, reliable and profitable sources of new loans and revenue.

According to Financial Services Committee Ranking Member Spencer Bachus, R-Ala., reality has become inescapable that "the housing sector is in deep decline." In a statement regarding H.R. 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, Bachus said, "Some say the people who offered and accepted loans with no reasonable expectation of repayment should be left to suffer the consequences of their bad decisions." Bachus emphasized, however, that "The difficulty is that it is not only those who suffer. The fallout from the current problems in the mortgage market has been widespread and has claimed many victims, including those who faithfully paid their mortgages and now see their home values declining; those in the construction industry and other housing-related industries who have lost their jobs; investors (including those saving for retirement through their pension funds) who have seen the value of their portfolios decline; anyone trying to sell a home; those living in neighborhoods dotted with boarded up or abandoned homes on properties that have been foreclosed; and small business owners whose borrowing costs have increased as lenders tighten their belts."

Preserving Access to Credit

According to Bachus, legislative efforts are intended to achieve "two very important goals: implementing reforms that will protect consumers from predatory lending practices, and preserving working Americans' access to consumer credit."

This balance is essential, not only to consumers, who are now facing difficulty in obtaining credit, but also to the profitability of the banking industry. According to Tom Brown, Vice President of Financial Services Solutions at LexisNexis, 25 percent of adults—50-70 million Americans—have sparse, or no, credit histories, yet may be very creditworthy. Because traditional tools do not capture them, these consumers may be lumped into the subprime category. As banks tighten their lending standards, with uncertainty being the purest definition of risk, creditworthy customers are being turned away. Brown noted that there are important differences between individuals with legitimately poor credit history and those with no, or thin, credit history.

A recent LexisNexis study shows the differences between underbanked and regular borrowers and the potential the underbanked market still holds for financial institutions. Among other findings, the study shows that:

• Regular borrowers have seven times the amount of bankruptcies than the underbanked populations.
• Regular borrowers represent 13.4 percent of the population with liens, while the underbanked represent only 8.05 percent.
• Underbanked consumers tend to have very similar assets and professions to regular borrowers, making them comparable credit risks.
• Only 6 percent of underbanked individuals own property, making this a tremendous opportunity for financial institutions to grow revenue through loans.

According to Federal Reserve Board Governor Randall S. Kroszner, "there is more to be done to deal with the significant challenges ahead." In remarks before the Consumer Bankers Association 2007 Fair Lending Conference, Kroszner stated that, "we all share an interest in working together to implement solutions that maintain a robust, transparent credit environment that promotes access to responsible mortgage lending."