“Read this Aug 2016 WSJ on SF-based First Republic Bank’s long-time mortgage lending business model; primarily to wealthier jumbo borrowers. Could it be any clearer that the FDIC and others are pressuring FRB to lower their mortgage lending standards (and increase their defaults and credit losses)…

…in order to comply with certain federal laws that they believe (in their subjective interpretation) require all federally-insured depository institutions like banks to lend a certain percentage of their total, to low income and minority borrowers, even if that’s risky, not their expertise, and as a result, they wouldn’t voluntarily choose to do so? Isn’t this exactly what happened for years, leading up to the 2008 housing and mortgage crisis and yet was blamed on the private sector and not the government and/or other consumer advocacy groups?”, Mike Perry, former Chairman and CEO, IndyMac Bank

“But banks aren’t simply businesses pursuing returns for shareholders: The government requires them to lend across income, ethnic and racial groups, even as it encourages banks to curb risks in the wake of the financial crisis. While First Republic’s mortgage business is being increasingly copied by the biggest banks, it makes few home loans to lower-income, black or Hispanic borrowers. For San Francisco-based First Republic, 91% of its mortgage approvals in 2014 went to high-income customers versus 45% for lenders nationally, according to a Wall Street Journal analysis of federal home-loan data that relied in part on ComplianceTech’s LendingPatterns.com. First Republic also lends to black and Hispanic borrowers at rates below the industry average. In 2014, it didn’t extend any mortgages to low-or-moderate-income African-American customers, according to the analysis. Overall, the bank gave 0.5% of its mortgage approvals to blacks and 2.2% to Hispanics in 2014 versus 5.5% to blacks and 8.9% to Hispanics at all lenders. The bank said there is no conflict between its loan strategy and equal-lending laws. “First Republic has a strong, affirmative outreach to serve low-income and minority communities,” General Counsel Edward Dobranski said. The bank also said it has made a concerted effort recently to lend more to these groups. Bank data from 2015 viewed by the Journal showed the bank’s rates of home lending to black and Hispanic customers were the same and lower, respectively, compared with the prior year. The company said it has increased lending to black and Hispanic customers in the first six months of 2016. The bank’s figures would be higher if loans purchased from third parties were included in the Journal’s analysis, it said. Banks sometimes purchase such loans to diversify their borrowers. Earlier this year, First Republic was criticized in a report by the Federal Deposit Insurance Corp. for low levels of lending to lower-income borrowers. Overall, the report said First Republic had “poor penetration among individuals of different income levels,” but said that it showed “no evidence of discriminatory or other illegal credit practices.” There are few clear answers about whether home loans to the rich could run afoul of diversity laws. One law pushes banks to lend across income groups in areas in which they operate. Meanwhile, other laws have been used to allege banks focusing on the rich are discriminating against minorities. The law specifies that “banks should not just lend to rich people,” said John Vogel, an adjunct professor at Dartmouth’s Tuck School of Business who studies lending. But “there aren’t any kind of criteria that say what percent of mortgages” have to go to lower-income people. The lender’s strategy has remained steady since its founding in 1985: attract affluent customers through jumbo loans, then use customer service to persuade them to buy other products. The bank said it now draws clients in other ways, too. The low default rates of jumbo loans help explain why the largest U.S. banks have all increased the portion of their mortgage approvals going to jumbo loans in recent years.”, Rachel Louise Ensign, AnnaMaria Andriotis and Paul Overberg, “First Republic: Is It Wrong to Build a Bank for Wealthy Clients Only? Bank makes few home loans to lower-income, black or Hispanic borrowers”, The Wall Street Journal, August 17, 2016

Markets

First Republic: Is It Wrong to Build a Bank for Wealthy Clients Only?

Bank makes few home loans to lower-income, black or Hispanic borrowers

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By Rachel Louise Ensign, AnnaMaria Andriotis and Paul Overberg

Brands like Ferrari, Prada and Hermès have built lucrative businesses by focusing squarely on rich customers. First Republic Bank is trying to do the same.

Over three decades, the bank has catapulted from a tiny thrift to a lender of choice for some deep-pocketed clients, including Facebook Inc. chief Mark Zuckerberg. The bank draws in clients with excellent terms on mortgages and perks like branch parties and private museum tours.

Shareholders are enamored with the bank. First Republic’s stock has gained 184% over the past five years, compared with an 82% increase in the KBW Nasdaq Bank Index. Its assets have climbed from less than $4 billion at the end of 2000 to $65 billion at the end of the second quarter.

But banks aren’t simply businesses pursuing returns for shareholders: The government requires them to lend across income, ethnic and racial groups, even as it encourages banks to curb risks in the wake of the financial crisis. While First Republic’s mortgage business is being increasingly copied by the biggest banks, it makes few home loans to lower-income, black or Hispanic borrowers.

For San Francisco-based First Republic, 91% of its mortgage approvals in 2014 went to high-income customers versus 45% for lenders nationally, according to a Wall Street Journal analysis of federal home-loan data that relied in part on ComplianceTech’s LendingPatterns.com.

First Republic also lends to black and Hispanic borrowers at rates below the industry average. In 2014, it didn’t extend any mortgages to low-or-moderate-income African-American customers, according to the analysis. Overall, the bank gave 0.5% of its mortgage approvals to blacks and 2.2% to Hispanics in 2014 versus 5.5% to blacks and 8.9% to Hispanics at all lenders.

The bank said there is no conflict between its loan strategy and equal-lending laws. “First Republic has a strong, affirmative outreach to serve low-income and minority communities,” General Counsel Edward Dobranski said.

The bank also said it has made a concerted effort recently to lend more to these groups. Bank data from 2015 viewed by the Journal showed the bank’s rates of home lending to black and Hispanic customers were the same and lower, respectively, compared with the prior year.

The company said it has increased lending to black and Hispanic customers in the first six months of 2016. The bank’s figures would be higher if loans purchased from third parties were included in the Journal’s analysis, it said. Banks sometimes purchase such loans to diversify their borrowers.

Many financial institutions long have catered to the rich. Some are exempt from certain rules on diverse mortgage lending, while others don’t face the same potential issues because they are private banks within firms that lend broadly.

Wealthy customers, seen as promising prospects for cross selling fee-generating products, are appealing to banks as they find profits pinched by years of low interest rates.

Earlier this year, First Republic was criticized in a report by the Federal Deposit Insurance Corp. for low levels of lending to lower-income borrowers. It did get good marks for employee community service and buying tax credits that fund low-income housing.

Overall, the report said First Republic had “poor penetration among individuals of different income levels,” but said that it showed “no evidence of discriminatory or other illegal credit practices.”

There are few clear answers about whether home loans to the rich could run afoul of diversity laws. One law pushes banks to lend across income groups in areas in which they operate. Meanwhile, other laws have been used to allege banks focusing on the rich are discriminating against minorities.

The law specifies that “banks should not just lend to rich people,” said John Vogel, an adjunct professor at Dartmouth’s Tuck School of Business who studies lending. But “there aren’t any kind of criteria that say what percent of mortgages” have to go to lower-income people.

First Republic has 69 branches, including in New York and Palm Beach, Fla. It offers mortgage clients, who have a median net worth of $3.3 million, perks such as fresh-baked chocolate-chip cookies and, until recently, ATMs that spit out only $100 bills.

At a recent party at a Midtown Manhattan branch, clients were served watermelon cocktails and oysters. Many were on a first-name basis with the branch manager and said personal attention was the reason they chose the lender.

Bankers said they know most of the customers who walk into their branches and can approve mortgage applications for existing clients within a day. They ferry cash to clients by hand if need be.

About three-quarters of its mortgage approvals are “jumbo” loans, or loans above $417,000 in most parts of the country. The average mortgage at First Republic is more than $1.2 million, according to the Journal analysis. The bank in 2014 had a higher concentration of jumbo loan originations than any other major mortgage lender, 88% of dollar volume, compared with 47% for J.P. Morgan Chase & Co., according to trade publication Inside Mortgage Finance.

The lender’s strategy has remained steady since its founding in 1985: attract affluent customers through jumbo loans, then use customer service to persuade them to buy other products. The bank said it now draws clients in other ways, too.

The low default rates of jumbo loans help explain why the largest U.S. banks have all increased the portion of their mortgage approvals going to jumbo loans in recent years.

When big banks’ mortgage defaults rose during the crisis, First Republic’s home-loan charge-offs were less than one-tenth the average for large banks, according to an investor presentation.

The bank is “an extremely creative lender,” said Chrissie Lawrence, a real-estate broker in Wellesley, Mass. She refers many clients to the bank, citing its willingness to make mortgages to those in unusual financial situations such as new doctors who don’t have enough savings or borrowers who need loans larger than the value of the home they are buying.

In 2012, the bank made a $5.95 million jumbo loan with a starting rate of 1.05% to Facebook’s Mr. Zuckerberg, according to public documents. Facebook declined to comment on Mr. Zuckerberg’s behalf; the bank declined to discuss details but said it offers better rates to bigger customers.

Posted on September 30, 2016, in Postings. Bookmark the permalink. Leave a comment.

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