Bank customers feel pinch

Call it the incredible shrinking bank.

Used to be that banks wanted to grow by taking in more deposits and lending more money. Now they turn down your loan application and even chase away customers by raising the interest rates on their loans.

They reduce your line of credit, especially if you don't use it.

They pay hardly anything for deposits.

They call to remind you about your monthly mortgage payment even if you always pay within the grace period.

All this despite pleas from the Obama administration to loan more money to help the economy grow.

What's going on here?

Although banks in Nebraska and Iowa say they have money to lend, big-picture realities have changed the way banks interact with many of their customers, even the good ones.

After the near-meltdown of the financial system in late 2008 and the worst recession in 70 years, banks, influenced by regulators, are avoiding even the whiff of risk and are beefing up their finances.

The economy is still weak, and another downturn could cause more job losses. Those could bring on more loan defaults, which might lead to bank failures like the 140 that occurred in 2009.

For banks, the situation calls for tactics like computer programs that flag details such as how near the deadline you make a payment, and trigger a phone call if you get too close. Other lenders are deliberately reducing loans and deposits so that the cash they hold provides a greater cushion against potential problems.

“We refer to this as the new normal,” said Stephanie Moline, executive vice president with First National Bank of Omaha.

The pressure comes largely from federal bank regulators who are charged with protecting the safety and soundness of the nation's financial system.

For the most part, regulators are insulated from the push and pull of daily politics. So statements by President Barack Obama and other officials urging that lending be increased haven't resulted in concrete changes in the way regulators work with banks.

In addition, Congress is reviewing the whole system of financial regulations, and regulatory agencies want to prove that they should survive as changes take shape.

For local banks, the regulators' word is law. And right now the regulators have decreed that banks keep more money on hand in relation to their loans. Regulators quickly earmark potentially troubled loans, and they punish banks that are lax.

One way for banks to improve their finances is to reduce lending, said Charles Funk, chairman of the Iowa Bankers Association and president and CEO of MidWestOne Financial Group in Iowa City.

That's why one Omaha bank didn't try to woo back a longtime customer who closed his account after the lender doubled the interest rate on his personal loan.

The customer had never been late with an interest payment, yet the bank raised the rate, without explanation, from just over 2 percent to about 5.5 percent. Knowing that the prime lending rate remained near zero added insult to injury.

Funk said sometimes that's what banks have to do.

“That's the best way for you to survive and go on, and get to a point where conditions are solid again and you can start to grow,” he said.

While “courtesy” calls from lenders reminding customers to make a mortgage or loan payment irritate some people, Nate Lakers of Omaha said he doesn't mind the monthly e-mail reminders he gets about his credit card bill, even though he doesn't miss payments.

“I don't need to worry about paying my credit card on time,” said Lakers, a business analyst for Millennium Capital Advisors of Omaha. “I receive the e-mail and follow the link, log in and pay my bill.”

Michael Jacobson, chairman of the Nebraska Bankers Association and president and CEO of NebraskaLand National Bank of North Platte, said most Nebraska banks have plenty of money to loan and an appetite to lend, but virtually every bank is working to increase its capital. Capital refers to the proportion of cash on hand in relation to money loaned.

“Banks' tolerance of losses is fairly low,” Jacobson said. “We can't afford to miss too often or it doesn't take long to blow through your capital.”

To minimize losses, banks pay attention to what's happening with you, the consumer.

Consumer loans are repaid from household income, and even a customer with a great credit history could be laid off, default on credit card debts and file bankruptcy.

“The problem is that there are a lot of unknowns out there: the tax rate, health insurance costs, where is the economy going to go?” Jacobson said. Even if the economy recovers, banks have learned that too much debt can cause serious problems for individual consumers.

“It's a difficult time for everyone right now,” said Mark Vitner, an economist with Wells Fargo Bank in Charlotte, N.C. “Banks are trying to manage the exposure better than they have in the past. That's a recognition of the economy that we're in.”

Consumers will notice the changes in several ways, including:

Ÿ Calling customers

If you usually wait until the grace period — after the “due date” but before the penalty kicks in — to make a loan payment, you're more likely to hear from your lender.

Banks are fearful that payment delays foretell delinquencies, and calling early can put the bank first in line if a customer delays payment because of a layoff or some other problem. Letting the customer know that the bank notices even a slight delay in payment can keep the customer on track.

“We want to be the squeaky wheel,” Jacobson said.

Ÿ Trimming credit lines

Banks must have capital to back up a line of credit, even if it's not used. And if it's not used, the bank loses money, because someone else could put that credit line to use and pay interest.

Ÿ Rejecting loans

Banks used to be able to “sell off” many of their loans by packaging them as securities for sale to investors. But that secondary market dried up after the infamous mortgage-backed securities — aka toxic loans — hastened the financial crisis. So the loans that banks make stay on their books.

That could be a good thing, by making bankers more careful about separating the credit- worthy from the non-credit- worthy and by considering the “Five C's” of lending: character, capacity, capital, collateral and conditions.

But it causes hardship for borrowers, including the owner of one small business who used to get loan extensions or renewals with a simple phone call. Now that his profits are down, his former bankers see him as a risk they can't afford.

Ÿ Raising loan rates and lowering deposit rates

Banks are under pressure to increase their capital, and one way to do that is to reduce the size of the bank. It's a math thing, prompting some banks to charge more for loans and pay less on deposits so that customers will go elsewhere.

Ÿ Requiring bigger down payments

Loans for 100 percent of the purchase price used to be common; now they're nonexistent, said Shawn Maloy, president of the Omaha Area Board of Realtors and owner of Maloy Real Estate.

Buyers have to put down 20 percent to get the best terms, he said — even people like those in the Midlands who “pay for what they buy.”

Most home loans are repurchased by Fannie Mae and Freddie Mac, which instituted more rigorous standards after the subprime loan disaster. “We're punished for the excesses of those in Arizona, Nevada and Southern California,” Maloy said.

Vitner, the Wells Fargo economist, said the changes in the financial world may restrict growth for the next decade.

“I think people are going to have to work harder because they aren't going to be able to rely on debt to sustain their quality of life like the baby boomers have.

“It's probably not that bad. Some growth may be slower, but it'll be more genuine.”

Contact the writer:

444-1080, steve.jordon@owh.com

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