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      Home » Lending

      Financial Institutions Need To Adapt To Overcome Loan Growth Challenges

      Submitted by on Thursday, December 19, 2013One Comment

      Raddon Financial Group’s National Consumer Research shows that anticipated demand for any type of loan has been declining for some time, and this trend accelerated in 2008 with our country’s economic decline.  Since then, despite the pronouncement by the National Bureau of Economic Research that the recession ended in June 2009, there is strong evidence to suggest that America’s psyche has been scarred with respect to carrying and taking on debt.

      Americans Report Fundamental Attitude Change Toward Debt

      Today, one-half of all Americans report that economic and financial conditions in the last several years have fundamentally changed their attitudes toward carrying and taking on debt.  Of those households that report such an attitude change, one-third state that they would never take on debt if it could be avoided.  Another one-third indicates that they would borrow money, but they are not comfortable until they have paid it back.  Although these attitude changes are more profound among older, lower income consumers who may find it difficult to make financial ends meet on a monthly basis, and those consumers that indicated their use of credit has caused/is causing them difficulty, other consumers of differing ages and income levels also have been impacted by recent economic and financial events.  As a result, a new paradigm has emerged that indicates consumers are eschewing the excesses of the past and adopting to various forms of austerity and thrift based upon their individual financial circumstances.

      Four in Ten Consumers Have Trouble Making Ends Meet

      The notion of a new paradigm (needs vs. wants or desires) is supported by the fact that our economy continues its slow expansion with sluggish job growth.  As of November 2013, the “total unemployment” rate (including persons unemployed 15 weeks or longer, discouraged workers, total under-employed, et. al.) was 12.7 percent, which is only a modest change from a “total employment” rate of 13.9 a year earlier (Bureau of Labor Statistics).  Raddon’s National Consumer Research shows that one-half of all consumers personally do not see any evidence that the recession is over, and four out of 10 of all consumers have trouble making financial ends meet on a monthly basis.  Going forward, jobs will be essential for a productive mortgage market given the advent of the new mortgage rules.  Of particular note, one new mortgage rule (a.k.a., the Ability-to-Repay {ATR} requirement) compels lenders to make a reasonable, good-faith determination before or when a mortgage loan is consummated to ensure that the consumer has a reasonable ability to repay the loan, considering such factors as the consumer’s income or assets and employment status (if relied on) against the mortgage loan payment, ongoing expenses, payments of simultaneous loans, and other debt obligations such as alimony and child-support payments.  The bottom line is, no job, no ability to repay…perhaps no mortgage loan.

      Adults Under 35 Shed More Debt

      The notion of a new paradigm is supported by a Pew Research Center analysis (entitled Young Adults after the Recession: Fewer Homes, Fewer Cars, Less Debt – February 21, 2013.)   This analysis found that after running up record debt-to-income ratios during the bubble economy of the 2000s, young adults (less than 35 years of age) shed substantially more debt than older adults did during the recession and its immediate aftermath – mainly by virtue of owning fewer houses and cars.  Further, the analysis strongly suggests that the lower debt-to-income ratios of younger adults reflected a broader societal shift toward delayed marriage and household formation.  Specifically, the analysis found that the composition of households headed by those younger than 35 years of age has changed over the past decade:  the analysis noted that for every 100 young adults, 40 represented heads of households, while in 2011, only 33 out of every 100 young adults were heads of households.  Of those who are not household heads, their spouses or unmarried partners typically live with relatives or with roommates.  This household formation trend identified by the Pew Research Center is also reflected in Raddon’s National Consumer Research.

      Student Debt Becomes a Game Changer

      Interestingly, the Pew Research analysis further found that the recession has altered the debt profile of younger adults.  Specifically, it found that student loan debt is a growing share of their total debt, and debt tied to residential property and vehicle and credit card debt is becoming relatively less important.  A main takeaway from the Pew report for this Senior Research Analyst was that mounting student debt loads has placed, and will continue to place, a substantial financial burden on younger adults/consumers.  Further, high student debt repayments may restrict young adults’ discretionary purchasing power and may reduce their access to other forms of credit.

      Baby Boomers May Need To Deleverage

      The notion of a new paradigm is supported by the fact that Baby Boomers—who drove the economic run up until 2008—must eventually realize that living with high debt levels is no longer sustainable if they want to maintain a semblance of their existing lifestyles during retirement.  At some point in the near future, they must begin to deleverage themselves, and as reluctant as some Baby Boomers may be, they may have to wean their children (and even grandchildren) off of the financially-dependent relationships that they have nurtured.  Carrying substantial debt into retirement will be untenable given the current anemic retirement savings level of Baby Boomers on average, and the projected cuts in government-sponsored social programs.  The alternative may be that Baby Boomers, in retirement, may need to seek financial support, if accessible, from those children (and, in some cases, grandchildren) that they have previously supported.

      Real Wages Lag

      The notion of a new paradigm is supported by the fact that real wage growth continues to decline (2013 Economic Report of the President).  Specifically, real wages fell by 0.2 percent in 2012.  As a result, a 1.9 percent increase in nominal wages in 2012 was more than wiped out by inflation, marking the 40th consecutive year that real wages have remained below their 1972 peak.  Further, our nation’s poverty rate remained unchanged in 2012 at 15 percent (U.S. Census Bureau), which is 2.5 percentage points higher than in 2007, a year before our country’s financial crisis.  Both economic trends are undercutting (i.e., narrowing the income divide of) the very definition of what it means to be middle class.

      What More Can FIs Do?

      The confluence of events outlined here is spawning a new paradigm that does not bode well for lenders.  Consequently, financial institutions that take no actions to adapt to these market realities will face significant challenges in meeting their loan growth objectives in coming years.  To mitigate this threat, institutions may want to:

      1. Focus your marketing energies and resources on niche markets such as first-time home buyers and small businesses;
      2. Recapture your customers’ loan business lost to competing lenders;
      3. Establish a seamless lending technology platform to speed application, approval and funding in order to ease the burden and the complexity of the lending process;
      4. Acknowledge that price and payment does not necessarily provide enough differentiation between you and your competitors to capture your customers’ business; and
      5. Recognize that your relationship with your customers can provide that differentiation.

      Lending is a different business today than it was ten years ago.  Although your target marketing needs to improve and your lending processes need to be simpler and faster, perhaps most importantly, your messaging needs to be refined.  Financial institutions should not see themselves as being in the business of making loans; they are in the business of offering better solutions to consumers and small business owners who do not necessarily want more debt, but want an improved financial horizon.


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      One Comment »

      • Minh McKenzie said:

        Great article

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