Student Loans Come Due

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Just as the Federal Reserve raises rates and inflation hits a 40-year high, Americans with federal student loan debt will start making payments on the debt after a two-year pause. On Aug. 31, the Department of Education will require 41 million people with student loans to begin paying again. 

According to the Federal Reserve, about one in five Americans have federal student loan debt and they saved $5 billion per month from the forbearance. It’s safe to say that a lot of people are going to struggle to restart those payments again and some of them work for banks.

The good news is that there are new employee programs that can help. One CARES Act provision allowed companies to pay up to $5,250 toward an employee’s student loans without a negative tax hit for the employee. Ally Financial, Fidelity Investments, SoFi Technologies, and First Republic Bank are a few of the many financial companies offering this benefit to employees. First Republic launched its program in 2016, after its purchase of the fintech Gradifi, which helps employers repay their employees’ loans. These programs typically pay between $100 and $200 a month on an employee’s loans, and usually have a cap.

The 2020 Bank Director Compensation Survey shows that 29% of financial institutions offered student loan repayment assistance to some or all employees. Many of those programs discontinued when the student forgiveness program started. In the anticipation of government forbearance coming to a close, now is a good time to think about restarting your program or even developing one. 

Americans now hold $1.59 trillion in student loan debt, according to the Federal Reserve. How did we get here? College got more expensive— much more expensive. 

Earlier this summer, the Federal Reserve and Aspen Institute had a joint summit to discuss household debt and its chilling effect on wealth building. The average cost of college tuition and fees at public 4-year institutions has risen 179.2% over the last 20 years for an average annual increase of 9.0%, according to EducationData.org.

At the same time, wages have not shown much inflation-adjusted growth. ProPublica found in 2018 that the real average wage of workers, after accounting for inflation, has about the same purchasing power it did 40 years ago. And inflation in 2022 has far outpaced wage increases. Some economists speculate that any pandemic-era wage increases are effectively nullified by this rapid inflation.

Not all borrowers are equally impacted. Sixteen percent of graduates will have a debt-to-income ratio of over 20% from their student loans alone, according to the website lendedu.com, while another 28% will have a DTI of over 15%. The 44% of graduates with that level of debt exiting school will face a steep climb to meaningful wealth building. The students that didn’t graduate will have an even harder climb.

Those graduates who struggle with their student loans will be less likely to buy a home or more likely to delay home ownership. They will be less likely to take on business debt or save for retirement. Housing prices have risen in tandem with education prices. The “starter home” of generations past has become unattainable to many millennial and Gen Z debt holders.

More than half of borrowers owe $20,000 or less. Seven percent of people with federal debt owe more than $100,000, according to The Washington Post. Economists at the Federal Reserve say borrowers with the least amount of debt often have difficulty repaying their loans, especially if they didn’t finish their degree. Conversely, people with the highest loan balances are often current on their payments. It’s likely that people with higher loan debt generally have higher education levels and incomes.

The Aspen Institute published a book known as “The Future of Building Wealth: Brief Essays on the Best Ideas to Build Wealth — for Everyone,” in conjunction with the Federal Reserve Bank of St. Louis. It illuminates long-term solutions for financial planning, focusing on policies and programs that could be applied at a national scale. 

In the absence of these national solutions, some employers are taking the matter into their own hands with company policies designed to help employees with student debt. Those banks are making a difference for their own employees and are part of the solution. 

The Secret To Mortgage Lending To First-Time Buyers

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mortgage-2-11-19.pngMarket volatility and interest rate hikes have created uncertainty for the entire mortgage industry. Lending portfolio growth has also met pressure from the tight housing supply and the influence of fintech on the mortgage process.
One bright spot in the coming years will undoubtedly be the first-time homebuyer market, but banks must adapt traditional lending practices to capitalize and compete successfully.

First-time home purchasers are now 33 percent of potential buyers. Some surveys have indicated millennials–the largest future housing buyer population–are starting to embrace home ownership. Crafting effective loan options for this demographic can provide opportunity for mortgage and home equity portfolio growth, achieve consumers’ home ownership goals and deliver beneficial partnerships between banks and borrowers for years.

Banks must address the following concerns with the first-time buyer:

  • Affordability: They are more likely to seek popular urban and so-called “surban” (new or redeveloped areas with an urban feel) environments to live. Today’s first-time buyers are enticed by alternative housing choices that typically have higher-priced entry points. Traditional builders have not focused on this sector due to profitability pressures from increased labor and materials costs, leading to a limited supply of entry-level housing. Rising interest rates further stress affordability factors for the first-time buyer and limit the options available for mortgage funding. 
  • Debt and Lack of Savings: More than 50 percent of millennials carry a rising amount of debt, with the average 2016 graduate holding more than $37,000 in student loans compared to $18,000 for the average 2003 graduate, according to Forbes. The pressure of this debt load means would-be buyers have little or no savings available for the traditional 20 percent down payment. Rate increases, especially on adjustable student loans, can exacerbate this issue for the first-time buyer though Redfin predicts a competitive labor market should bring higher wages in 2019.
  • Income and Alternative Purchase Structures: The rise of the “gig economy” has led to a high number of independent contractors in this cohort, according to Forbes. Emerging first-time buyers have also shown interest in purchasing homes to create opportunities for rental income and nontraditional co-borrowers.

Lenders can differentiate their approval process from competitors by empowering loan underwriters with structures and guidelines that address the unique challenges of the first-time borrower. Revising mortgage guidelines and devising strategies for affordable home ownership will create valuable long-term relationships with first-time homebuyers. Just a few approaches to consider are:

  • Rethinking Loan Parameters: Mixed-use properties and home-improvement loans are typically excluded from the primary mortgage process. Banks incorporating alternative building structure options and creating allowances for home renovations in the initial mortgage parameters can substantially increase the pool of homes available to buyers. 
  • Differentiating Loan Structures: Traditional mortgages may be out of reach for many first-time buyers and may not address alternative housing solutions. While options with a higher loan-to-value ratio exist, most require mortgage insurance and are subject to increased scrutiny. Pairing conforming first mortgages with home equity loans and lines offer affordable loan structures at higher loan-to-value ratios and create long-term relationships. With proper planning, including the possible use of portfolio protection products, these structures can be offered without adding risk to the bank’s loan portfolio. 
  • Diversifying Income and Debt Guidelines: Considering tenant income and/or co-borrowers may be the only option for a potential buyer to enter the housing market. In addition, banks may also need to expand guidelines to allow for alternate sources of income, such as independent contracting income, in the underwriting decision process. 

Even with numerous obstacles, first-time home buyers offer opportunity in the mortgage origination market. Addressing the needs of this sector while avoiding the risks, lenders can create profitable mortgage and home equity portfolios, which may be the best way to mitigate the uncertainty of traditional lending in the future.

NFP is a leading insurance broker and consultant that provides employee benefits, property and casualty, retirement, and individual private client solutions through our licensed subsidiaries and affiliates. Our expertise is matched only by our personal commitment to each client’s goals.

How U.S. Bank Helps Distressed Borrowers

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mortgage-7-4-18.pngLike many lenders during the Great Recession, U.S. Bank found itself with a large number of mortgage loan borrowers who couldn’t keep up with their payments, and it had little help to offer. This was bad for the bank and borrowers alike because mortgage loans that went into default often ended up in foreclosure, which drove up the bank’s costs while putting the borrower at risk of losing their home.

Scott Rodeman, a senior vice president for consumer loan servicing who joined the Minneapolis-based bank in 2014, knew there were resources available to distressed borrowers from his experience at a previous bank employer, and he reached out to SpringFour, a 13-year-old company headquartered in Chicago. SpringFour acts as a conduit to agencies and organizations that work directly with borrowers having trouble making their loan payments because of other financial issues, like the loss of a job or mounting medical bills from a serious illness.

“Coming out of the mortgage crisis, mortgage servicers were somewhat limited in how they could help their homeowners…stay in their homes,” says Rodeman, who is responsible or U.S. Bank’s mortgage, auto and consumer loan collections, repossession, recovery and loss mitigation operations. The bank could offer solutions to homeowners who still had some cash flow, but it had little advice for those who couldn’t even make a partial payment. “Really, our loan counselors had very few options to help them improve their financial cash flow to pay for home-related expenses, housing and things like that,” Rodeman says.

That’s where SpringFour comes in. The company provides a cloud-based technology solution called the S4 Desktop that allows lenders like U.S. Bank to refer distressed borrowers to nonprofit organizations and government agencies that can help them get their financial affairs in order. “When people get behind and can’t pay their bills, it’s really because of something that’s happening in their financial lives,” says SpringFour CEO and co-founder Rochelle Nawrocki Gorey. “There’s a lot of shame attached to financial challenges, so they don’t reach out and get help. We believe that when people are living paycheck to paycheck, they need and deserve to be connected to local resources that can help.”

U.S. Bank and SpringFour were co-finalists in Bank Director’s 2018 Best of FinXTech Innovative Solution of the Year award.

The S4 Desktop solution can be accessed by U.S. Bank service representatives by logging into the service via the web. From there, they can direct the borrower to agencies and organizations that can help that individual work through their financial crisis. A link to SpringFour can also be found on the U.S. Bank website. The SpringFour database contains over 10,000 resources in all 50 states, and Gorey says her firm is constantly vetting and curating the data to keep it up to date. “We have a professional data team that is assessing the nonprofits for track record, reputation, funding and capacity to assist,” she says. “We’ve built a strong track record of trust with our financial institution clients. They know when they make a referral through SpringFour, it’s going to be accurate.”

Because the S4 solution is cloud-based, there were no implementation issues to speak of, according to Rodeman. “There was no technical work or development work really,” he says. “It was all customer-facing edits to our existing processes. Then, of course, training our employees to offer the service and manage that just like any other call center function.”

U.S. Bank has been working with SpringFour for about two years, and Rodeman says the program has shown tangible results. “Consumers that receive these referrals are twice as likely to engage in some kind of loan workout strategy with us rather than just allow the house to go into foreclosure,” he says. “That’s a significant number.” Mortgage borrowers that receive referrals are also 10 percent more likely to remain current with their mortgage. An equally important if less tangible benefit is that the program has enabled the bank to build a deeper relationship with its customers. “Coming out of the crisis, consumers were afraid of their mortgage servicers,” says Rodeman. “For us to see that kind of engagement rate increase shows that we’re building rapport and trust with our customers.”

If U.S. Bank had access to the SpringFour program during the mortgage crisis, Rodeman believes it would have helped reduce the number of foreclosures. The economy is much healthier today, of course. But even now there are borrowers who need help making their loan payments, “Based on our numbers in an improving economy, I don’t see why it wouldn’t have [helped] back then.”

Competing for Consumer Loans Through Collaboration

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If the economy’s backbone is small business, then small business’ backbone is community banking. Unfortunately, both economic and policy developments have dealt community banks a sustained blow from which they can only recover together. The challenge is for community banks to leverage the scale they lack as individual institutions but jointly possess.

The indications of stress are stark. It was just a generation ago that community banks accounted for nearly 80 percent of consumer loans. The number today is less than 10 percent. The largest banks are simply driving community banks out of the lending business.

The irony is that some of the difficulty community banks face actually results from policies intended to help them. Regulations that were supposed to limit the largest banks instead created impossible compliance burdens for small ones. The lifting of limits on interstate banking gave the big players a further leg up. But the biggest challenge has come from the shift of many types of lending away from relationship-based, customized lending (at which local banks excel) towards process-based, standardized lending (which requires scale to afford the systems, people, models, marketing and processes that are required).

This evolution from handshakes in a local bank to anonymous clicks in online applications required massive investments in technological platforms that community banks were unable to make. Yet despite the pressures, community banks retain advantages with which no large bank can compete: the trust and genuine loyalty of local customers, a personal understanding of their needs and the willingness and ability to customize their offering to the specific needs of customers when appropriate.

But if they are to survive, personal service alone will not be enough. If these banks lose the ability to offer the broad array of products and services that have become process-intensive (consumer lending, small business lending, wealth management, etc.), they will lose their connection to their customers who are forced to look elsewhere. Community banks must combine what they are uniquely good at with the scale necessary to go toe-to-toe with the largest banks. The good news is that these banks, collectively, already have that scale. Taken together, community banks command $2.3 trillion in assets—14 percent of the economy and more than enough to compete with any of the largest banks.

“Together” is key. The imperative for community banks is to find ways to take advantage of their combined scale while retaining the local focus and service for which they are legendary.

One such model is BancAlliance—a collaboration, as the name suggests, of more than 200 community banks with more than $300 billion in assets in 40 states. That $300 billion would be enough to rank these institutions together as one of the 10 largest banks in the country. The network is managed by Alliance Partners.

Among other benefits, partnerships like BancAlliance can help community banks seize the opportunities in the financial markets that new technologies enable. New players like Lending Club are using high-end online platforms to provide first-in-class customer experiences that are taking ever larger swaths of the consumer lending business away from the largest mega banks.

The platforms are so sophisticated, though, that no single community bank has the resources to figure out how to forge a partnership with them. By partnering through collaborations like BancAlliance with lenders like Lending Club, community banks can combine their knowledge of their customers with the new lenders’ unmatched customer experience platforms. BancAlliance, for example, is allowing its members to achieve those benefits through a partnership under which the Lending Club platform is offered through community banks.

BancAlliance is a promising model for collaboration, but only one. Regulators are recognizing and encouraging the value of these efforts, even as tiered requirements and limits on consolidation are also improving the policy environment. The key to these collaborative efforts now is that community banks realize the value of their combined scale.

Community banks still have the best advantages in a business that ultimately distills to relationships and trust. But the detriments of smaller individual size have begun to erode those assets and, absent action, could threaten the sustainability of the community banking model. By joining forces—collaborating with each other and partnering with institutions that can give them access to the advantages of technology and reach—community banks can convert a serious problem into a compelling opportunity. And history tells us that when they are able to compete on a level playing field, community banks prevail.