Lending Industry Trends

Industry Consolidation

Consolidation

Specialization

In the past 10 years, the number of commercial banks in the US dropped by almost 30 percent. Large economies of scale in banking operations have encouraged consolidation, which has produced several dozen very large banks with more than $50 billion in assets. Smaller banks are still able to thrive by providing personal attention smaller customers don't get from large institutions.

Several factors have encouraged consolidation in recent years: larger companies have easier and cheaper access to capital markets, computer systems can now handle credit analysis and loan tracking functions for large portfolios of loans, and the industry's strong profitability has prompted many companies to expand by buying smaller firms that already have offices, personnel, and a local presence.

Economies of scale encourage mortgage bankers to specialize in one particular activity, such as loan origination, loan servicing, or portfolio management. Many smaller companies specialize in loan production and immediately resell their loans to larger companies. Some companies don't originate loans but buy servicing rights or specialize in delinquent loans. Generally, only the largest companies have the resources to manage a large portfolio of mortgages.

Expansion of Subprime Lending

Demand for Consumer Credit Growing

Industry Consolidation

Commercial and industrial loans have become a less important source of revenue for banks, partly because large corporations now have direct access to capital markets. In the last 15 years, the proportion of such loans in commercial bank loan portfolios fell from 30 percent to 20 percent. During the same period, real estate loans rose from 45 percent to 55 percent.

Overall demand for consumer credit grew 50 percent in the last 10 years, especially to finance cars, furniture, and other large consumer items. The subprime segment of the market has grown even faster. Average consumer credit outstanding is close to $6,500 per person.

Driven by economies of scale, the industry has undergone strong consolidation. The industry is now dominated by a few large mortgage bankers, typically divisions of big commercial banks, with efficient operations and easy access to capital. Access to low cost capital, often in the short-term credit markets, keeps mortgage rates low but also exposes mortgage bankers to a credit squeeze.

Electronic Fraud and Identity Theft

Refund Lending

Subprime Market Growth

Identity theft is the fastest-growing financial crime in the US. The cost is largely borne by banks rather than consumers. Security standards implemented as part of the USA Patriot Act may deter some types of fraud, but the increasing volume of Internet commerce will probably increase fraud losses.

Tax refund anticipation loans have been a strong source of growth for consumer finance companies, despite a number of high-profile, multi-million dollar lawsuit settlements regarding them. Refund-anticipation loans number in the tens of millions a year, but most are made by just a handful of lenders. Consumer groups claim that the interest rates lenders charge are often exorbitant.

Subprime loans require more intensive servicing and have higher delinquency and foreclosure risk, and carry interest rates higher than those of regular mortgages. While regular mortgages typically have delinquency rates around 2 percent, delinquency rates for subprime mortgages are above 10 percent. Growth of this market was stimulated in recent years by the appetite of investors such as hedge funds for high-interest investments, and by the long rise of home prices, which protected investors in subprime mortgages against loss on foreclosed properties.

Evolution of ATM Networks