Home / Focus / Banking & Finance March 2007 / Bill increases state-chartered bank loan limit, risk

Bill increases state-chartered bank loan limit, risk

‘We’ve seen more and more banks come from out of state offering loans.’ — Tanya Wheeless, president of the Arizona Bankers Association, on the competition Arizona banks face

Tanya Wheeless expects to see a more competitive banking industry in Arizona’s future…that is, if a bill she anticipates being heard in the Senate this month passes and moves on to the governor for signing.
Already approved by the House, if bill H2198 becomes law it will increase the legal lending limit for a state-chartered bank to 20 percent of its capital to a single borrower without “readily marketable collateral.” The current limit 15 percent.
Tanya Wheeless, president of the Arizona Bankers Association, which represents 68 banking institutions statewide, says 34 Arizona state-chartered banks will be impacted by such a law.
“Preliminary discussions suggest it will pass,” she says, foreseeing Arizona banks being able to take advantage of the new limit by late summer or early fall.
“Currently, 34 states and the District of Columbia have a lending limit that exceeds the Arizona limit of 15 percent, including all of our neighboring states,” Wheeless wrote in a recent commentary.
“For Arizona banks, and specifically those doing business near the borders, that means competing with banks that can make bigger loans, and often losing the business. We would like to see that business and capital stay in Arizona, with banks that will reinvest in the state and support the community,” she explained.
Arizona is a thriving community, but the lower rate currently imposed affects how competitive the state’s banking institutions can be, she said in a phone interview.
Business leaves state
Banks in cities along the borders lose business regularly to institutions in neighboring states such as California, New Mexico and Nevada, which each have a higher lending limit. They can offer better deals for businesses seeking loans, and they are, she says.
“We’ve seen more and more banks come from out of state offering loans,” she says, which creates an unnecessary loss for Arizona business, in general.
Although this does increase the competition, it doesn’t necessarily keep the competition in state, which is where she’d prefer to see the monies stay.
National banks are also at the 15 percent legal lending limit, a fact Wheeless says led to some initial debate. State legislators were concerned about the safety and soundness of increasing the lending limit for an industry already based upon financial risk-taking.
The Bankers Association did look into this, Wheeless says, and discovered that 29 other states with lending limits higher than Arizona’s were outperforming Arizona. Her association also looked closely at the number of charge-offs these states’ banks had incurred in the last seven years. “Charge-offs” is the word banks use to describe what a business calls a write-off, or bad debt. She found that they had fewer charge-offs, suggesting there is no correlation between higher debt and higher lending limits.
She also told legislators that she was unaware of any recent bank failures, regardless of the lending limit.
Kevin McCullough, assistant superintendent of the Department of Financial Institutions, attended the special meeting on the day the bills was passed in the House and also was asked to address this concern. According to meeting minutes, he said he believes the risk is warranted, in light of competitive pressures.
Despite the expected change, Wheeless says some banks will still utilize a limit lower than even the current one. To be more competitive, they may just wind up partnering with other banks, depending on how they prefer to structure deals.
“But they like having the flexibility,” she adds, “Every bank looks at what makes the most sense for them, depending on how they need to manage risk and underwriting…So the statute just creates a ceiling, not a floor.”
What the bill also does is create more paperwork for banks. For every transaction made that uses the higher lending limit, a written notification of the transaction must be sent to the Department of Financial Institutions – the state’s regulatory arm for the banking industry and other financial institutions.
“This is something new, but it will be notification only. No action will be required by the state and no approval. It’s just paperwork,” she says.
“The important part is that it will create more capital for Arizona,” she says, “It’s good for economic development.”
Other issues the Bankers Association is dealing with include:
Mortgage fraud
Between 1997 and 2006, Wheeless says, the number of mortgage fraud incidents has grown nationally by about 1,400 percent, and Arizona is a hot spot for a crime that is hard to prosecute.
Whether it involves providing false information on applications or overvaluing a piece of property, “It’s a huge problem,” she says, affecting both consumers and lenders.
Sen. Jay Tibshraeny, R-21, sponsored S1221 that the Bankers Association supports because, if it becomes law, it will provide the tools needed to prosecute these cases. Currently, Wheeless says, it’s difficult to build a case against mortgage fraud because the definition is unclear, and people don’t always know they are committing a crime. This bill will clearly define it. It passed in the Senate and is now being considered in the House.
Additionally, she says a task force was created at the end of 2006 to look at ways all involved parties can work together to combat the problem. Local, state and federal entities, including as many as four state departments, the Federal Bureau of Investigation, the Internal Revenue Service, the Arizona Attorney General’s Office, the Mesa, Phoenix and Scottsdale police departments, and others are participating in this unfunded effort.
Jack Hudock, an attorney and spokesperson for the Department of Financial Institutions, which is part of the team, says the task force is an on-going effort until the matter is resolved.
The Mortgage Asset Research Institute (www.mari-inc.com) plans to issue a report in April that will illustrate how prevalent mortgage fraud is in the country, but as Hudock understands, “The frequency is going through the roof.”
Debtors get creative
As the real estate market dropped, people who could no longer make money so easily, “got creative,” he says.
The “cash-back, out of escrow” scheme, which is where the seller receives a kickback, has become particularly commonplace as homes are now harder to sell than they were a year or two ago. An appraiser may be enlisted to increase the value of the property for sale, and the seller may be taking part in a crime without knowing it, says Hudock.
The goal of the task force is to put the criminals in jail and to educate the public about the problem.
“We want to stop people from getting roped into crooked deals,” he says.
Banks embrace the latest tech
It wasn’t long ago that American banks began moving away from the brick and mortar aspect of having a local office, expecting technology to take over the banking industry. While it has to some extent, Wheeless says banks are now moving back to brick and mortar, realizing that many customers still prefer handling financial transactions in person.
“But they still need to increase technology options as well,” she says.
The latest craze is remote capture. This scanning system allows a business to scan all checks that come into the business and then deposit them to their bank account electronically. It is not for bill pay systems.
An emerging technology that has not yet caught on in America but is popular in Asia involves biometrics. Customers who want to gain access to their accounts provide either retinal scans or thumbprint scans, which become their key to entry.
Popular in parts of Europe and Asia, some banks offer access to account information via text messaging. The practice is catching on, however, as more and more of the larger institutions, such as Wells Fargo, Chase and Bank of America, are experimenting with it.
Wheeless says in Arizona the high tech forms of banking will show up first at the larger institutions and then trickle down to the smaller independents, just as online banking has done.
These are things to watch for, she says.

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