Technology is combining with other forces to split lenders into two camps: those that sell relationships and those that sell transactions.
The big difference between the two, according to one observer who addressed a recent industry conference, is that the transaction lender is large enough and automated enough to make a profit on standard loans while charging the lowest rates. All others, he says, will necessarily have to become relationship lenders, offering innovative and specialized products to established customers, a situation in which price is not crucial.
These conclusions are drawn from two talks by William B. Rayburn, a consultant who also teaches finance at the University of Mississippi, at the National Mortgage Markets Conference sponsored jointly by America's Community Bankers and the American Bankers Association.
Mr. Rayburn warned, however, that many midsize banks and thrifts, while determined to be relationship lenders, lack the tools to get the job done. A key problem, he said, is that institutions often do not have data on their customers in a format they can use effectively for marketing purposes.
"Everybody is eager to use Windows NT," he said, "But that's a 32-bit system, while most of their data is in 16-bit or even 8-bit format," he said.
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He asked his audience how many of their companies were using credit scoring. About 40% raised their hands. "Now how many of you understand credit scoring?" he asked. No hands were raised.
Getting up to speed on credit scoring is crucial for two reasons, he said. "I believe the market is in the B and C and D loans, where the returns are higher," he explained. But the risks are higher as well, and they require risk-management expertise, something most small and midsize thrifts have never had to learn. "The reality is that if you don't get risk analytics down, it will be a risky business," Mr. Rayburn said.
Also, he said, examiners will be asking about how credit scoring is being used, and lenders will need to have someone available to provide the answers.
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The pilot program under which the Federal Home Loan Bank of Chicago will share the risk on loans marketed by its members is drawing mixed response from America's Community Bankers' member thrifts.
Under the program, the Chicago bank would make the loan and the thrifts would, in effect, function as brokers-though they would retain servicing.
"A lot of members in the area, particularly the smaller ones, like it because it's a lower-cost alternative to Fannie and Freddie," said Paul A. Schosberg, president of the trade group. "But it also makes the Home Loan banks direct lenders."
Mr. Schosberg said the political and economic tradeoffs needed to be analyzed. "An orderly and cohesive vetting of the process is needed, and we can do it for all the government-sponsored enterprises."
