It was a year of rising interest rates, governmental reorganization and paving the way to the future for the banking and lending industry.
For local banking professionals, 2005 was the year to step up. The dynamics of the banking scene got a whole lot more competitive with Bank of America pulling down the signage at Fleet Bank branches it acquired and embarking on its first year of operation in the Bay State under its own banners.
“They [Bank of America] are a strong competitor,” said Kevin F. Kiley, executive vice president and chief operating officer of Massachusetts Bankers Association. “They forced banks to look at strategies, be out in the marketplace and be more aggressive.”
Though the number of banks operating in Massachusetts is down from roughly 350 in 1995 to about 210 currently, there are more branches today than ever before. Banking needs are being met, but competition for retail and commercial customers is fierce.
While the number of banks has dwindled over the years, David Cotney, senior deputy commissioner of the state Division of Banks, said he witnessed resurging interest in the formation of new banks over the course 2005. Patriot Community Bank in Woburn and The Bank of Cape Cod in Hyannis filed applications to create new banks this year. Neither bank will open until next year, but more applications are expected to come in after the new year, said Cotney.
“This is the first time we have seen so much new bank activity in years,” said Cotney.
Meanwhile, many legislative initiatives related to banking and lending stalled out during the past year, a result, industry watchers say, of committee restructuring. The former Committee on Banks and Banking and the Insurance Committee were merged to form the Joint Committee on Financial Services. According to David E. Floreen, senior vice president of government affairs and trust services for the Massachusetts Bankers Association, there has not been a reorganization of the committees in 37 years. In addition to delays resulting from the merger process itself, Kiley said bank-related bills now much vie with legislation related to other financial services for attention on Beacon Hill.
“Consequently, the impact from a banking perspective is the banking issues haven’t been as dominant as they have in other years,” Kiley.
“So next year will be a busy year,” said Daniel J. Forte, president and CEO of the MBA.
About 30 bills related to banks and credit unions could have gone to vote in 2005, but only one major bill was voted on and approved, said Floreen. The rest will be addressed after the new year.
The bill that was approved addresses trusts, allowing trustees to distribute principal to trust beneficiaries who in the past were only entitled to the trust interest income. Floreen said the overall value of trust funds administered by banks has continued to rise even when the amount of interest income from trust assets such as stocks has seen decrease over the years.
“Boston is the third- or fourth-largest city in the world with respect to money management,” said Floreen. “Wealth management is a major but quiet industry in this town. Managing wealth and money for others is a very significant but private industry in this city.”
Though the statute is new for Massachusetts at least 40 other states already have similar laws in place.
“It really sets out guidelines and standards. It provides significantly greater latitude to make investment decisions and allocate assets between principal and income,” he said. “Under the previous rules all that increase went into the principle bucket. State law didn’t provide the legal flexibility.”
Preventing financial fraud and security breaches remained a priority in 2005. For bankers, debit card fraud can be a worrisome and costly process. Banks tend to take an extra conservative and cautious approach in these instances by issuing new cards to customers who may have been and could be affected. In 2004 security breaches at BJ’s
Wholesale Club and DSW proved costly for banks that issued new cards to account holders whose financial information was compromised at $8 to $12 per new card.
“Banks had to reissue cards just in case,” said Kiley. “It is a lot of [cost] that you have to incur to protect the security of your customers.”
Some changes have been made this year and others could be in the works. In instances when a retail store’s database is compromised, MasterCard is now picking up the cost of replacing customer debit cards for banks that issue cards with the MasterCard symbol.
“We pushed them [credit card companies] to do more communication with banks [when security breaches occur] as well,” said Kiley. “This helped large and small banks.”
The MBA is hoping Visa will adopt the same practice in 2006.
National Front
Forte called 2005 “more of a preparation year in Congress” in terms of national banking bills. He said there are several initiatives that Congress is expected to take up in the coming year. “Much of what was worked on this year will be coming in 2006,” he said.
However, 2005 saw the implementation of a sweeping bankruptcy reform law that makes it more difficult to file bankruptcy.
“It really changed the psychology of bankruptcy,” said Forte. “We think it’s helpful in solving a lot of abuse.”
He said too often, people were filing bankruptcy for planning or strategic reasons, not because they were in need of a fresh start due to financial hardship.
However, the law does exempt people who earn less than the area’s median income.
While many industry watchers are keeping an eye on Wal-Mart’s attempt obtain a national charter as an industrial lender in Utah, local players also are pondering what sort of changes the Bay State could see as the nation’s retail leader seeks to branch out to offer financial services. This year Wal-Mart also filed for a check-cashing license in Massachusetts.
Forte said the two applications – one at the federal and one at the state level – do have some area bankers concerned. “It makes us very suspicious that [Wal-Mart’s] intentions are bigger,” he said. “This simultaneous application does raise concern of intent.”
According to Robert E. Bessel of COCC, a Connecticut-based data processing company focusing on financial institutions that is active in the Bay State, 2005 taught the industry that technology has a home in the banking world and is here to stay.
“The big story of the year is that the need for technology continues to grow,” he said.
Technology is necessary in fighting fraud and protecting security, as well as check processing. However, the banking industry has not been known for being tech-savvy, Bessel said.
“Most bankers who got into the business did it because they were bankers not because they were computer experts,” he said. “It keeps pulling bankers away from their business, which is banking. But if they don’t [keep up with technology], they are dead in the water.”
Core Business
Cotney said the DOB also is trying to keep up with technology. This year it started accepting applications to open new bank branches online. He said while all applications can be downloaded from the agency’s Web site, the DOB will be looking to implement easier ways for people to handle paperwork.
“We are exploring some options for other applications online,” he said.
The Massachusetts Fair Lending Task Force, made up of industry trade groups, regulators and businesses, grew more active this year, Kiley said. The 10-year-old task force spent 2005 working on a report that lists guidance and bestpractices for non-discriminatory lending practices. The report will be released early next year. Kiley said it is “a way to move forward in fair lending.”
Banks have undergone fair lending exams for years. This year, a change in state law made non-depository institutions subject to the same fair lending exams. It was passed as part of a new predatory lending bill in 2004. Letters from the DOB went out in May to all licensed mortgage lenders in Massachusetts to provide guidance on the examinations.
“The examinations are still new,” said Cotney, adding that the DOB does not have information regarding how the mortgage industry overall is faring in the exam process so far.
At the close of the year, mortgage applications were down, suggesting the housing market could be slowing. Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, said such a shift in the marketplace has been expected. However, Cuff said for the first three quarters of 2005 it was not as bad as many in the mortgage industry expected and loan originations remained relatively strong. He said the dropoff in volume was about 15 percent. But the decline in business appeared to be increasing as the year comes to a close, he said.
“Word on the street is [mortgage volume in] quarter four dropped significantly,” said Cuff.
Although the fourth quarter numbers will not be available until February or March of 2006, Cuff said the mortgage industry is examining its approach to the market and starting to move in new directions.
“It’s getting back to the core purpose,” he said, explaining that many mortgage firms will focus their energies on home-purchase loans rather than refinancing business.
He said he also sees the mortgage industry paying more attention to and competing for smaller customers such as condominium purchasers and first-time homebuyers.
However, others in the mortgage industry noted that some borrowers have been refinancing out of some adjustable-rate loan products as interest rates rise, giving at least a temporary boost to business. Also, many agree it is premature to say how rising interest rates will affect the lending business and how many homeowners will be opting for more predicable and stable lending options until more time has passed.
“I think we are in a changing marketplace,” said Cuff. “Interest rates have risen. The real estate market has cooled. Now in this last quarter, I think we are finally starting the see the effects of that.”
