Like their national brethren, state banks are suffering. The difference between the two is Arizona’s community banks — by and large — are not the orchestrators of their own tough times, says Arizona Department of Financial Institutions Superintendent Felecia Rotellini.
In discussing the plight of the banking industry, Rotellini is careful to delineate between the national banking industry, responsible in large part for the subprime mortgage debacle, and state banks, which are suffering largely for reasons not of their making.
Community banks in Arizona, which “did not contribute to the national situation,” she says, are nevertheless caught in a downturn that arose because they continued doing what they’d formerly done with much success — serve businesses in their communities.
The department oversees 34 community or state-chartered banks, along with 26 credit unions and other financial institutions. These companies work by serving small- and medium-sized businesses, among them firms involved in the construction and development industries.
In growth states like Arizona, this has generally been a healthy practice. Construction has traditionally been a driving force for the state and for the firms working with community banks and lenders.
But when the real estate business took a turn for the worst, community banks began to see their particular crisis emerge.
“Community banks serve community businesses, and one of the primary areas of business is construction and development,” Rotellini says. “When the value of their collateral decreased, our banks began losing profits because they had to re-evaluate their loan portfolios. So that is where we’ve seen one of our primary challenges.”
Community banks and lenders, she says, are suffering from the downturn in the real estate and construction industries.
“This is all based on the fact that real estate is cyclical, and we’ve had such an upswing in the real estate market,” Rotellini says. “But what comes up must go down. And we’re at the bottom of the cycle, waiting to go back up again.”
In the meantime, the department is “working with banks to weather the storm,” the superintendent says. That means ensuring the safety of banks and increasing their review of loan portfolios and assets.
The department is also working closely with the Federal Deposit Insurance Corporation (FDIC) to ensure community banks have properly evaluated real estate and have adequate monetary reserves.
They’re also working to shore up confidence within the state banking industry.
“We’re waiting patiently for the bottom,” says Rotellini. “Once we hit that, consumers will have more confidence in buying homes, and banks will have more confidence in lending.”
The department also aims to ensure that when the housing market does rebound, it will be a more regulated and secure environment.
Financial Institutions oversees independently licensed mortgage brokers and bankers. Recently, DFI has been working to promote a law requiring all loan originators be licensed. As of 2010, that will happen, adding a much-needed degree of oversight within the industry, DFI officials say.
Without this additional oversight, and with some loan originators meeting state scrutiny and others operating under the radar, another housing debacle could one day be in the offing.
“We’re trying to prevent another wave of bad, risky loans,” says Jack Hudock, public information officer for the department.
The department estimates between 5,000 and 8,000 loan originators will need to acquire licensing by January 2010. This, says Rotellini, will do much to increase public confidence in the lending arena. It also meets a recent federal requirement — part of the S.A.F.E. Mortgage Licensing Act of 2008 — calling on states to regulate and license all loan originators within a year.
To promote the state’s licensing plan, DFI partnered with Arizona legislators and the state lending industry, to ensure all brokers and bankers are meeting high standards.
“It’s OK to have competition within the industry. But it’s not OK to have people who are not being properly trained,” says Rep. Bill Konopnicki, a Safford Republican, who worked with DFI on the plan.
In addition to licensing, supervising and regulating state chartered financial institutions, the department also reviews complaints filed by consumers against licensed entities when violations of state law or rules are alleged.
Included among Arizona institutions the department regulates are: collection agencies, debt management companies, motor vehicle dealers and sales finance companies.
“The role of the department is to ensure that the state’s financial institutions are safe and sound, and they do a good job of that,” says Tanya Wheeless, president and CEO of the Arizona Bankers Association.
“They say that you can see someone’s true character in difficult times, and these are difficult times for banks and bankers,” says Wheeless. “We’re seeing the DFI right now as strong advocates for the state’s banks.”
Anne Hilby, with Arizona Attorney General Terry Goddard’s office, calls the department a frequent partner in consumer investigations, and a value to the Arizona financial community.
“We have a strong working relationship with the department,” she says.