Bankers keen on cracking into underserved Hispanic markets should closely watch an experiment in Kansas City, Kan., being conducted by Enterprise Financial.
The $3.2 billion-asset company opened a branch in a Mexican immigrant community on the western side of the city in February. So far, the location is well on pace to surpass forecasts for loan and deposit growth, and the company is already fielding requests to open more branches, including in its hometown of St. Louis.
"We've already had people contact us from across the country," Robyn Heidger, Enterprise's director of diversity and inclusion, said in a recent interview, but "we want to wait and see more of a track record" before expanding the concept.
The long-term outcome could turn on a product that a lot of bankers are unfamiliar with, and a few are outright skeptical of: mortgages to borrowers who lack Social Security numbers but have individual tax identification numbers.
Heidger said 16 of the branch's first 23 mortgages involved ITINs, adding that there is potential to make other types of loans based on an applicant's ITIN.
ITIN loans often generate controversy, as some borrowers incorrectly equate the status of many noncitizens with illegal immigrants. Enterprise is making ITIN loans to borrowers who are in the country legally, Heidger noted.
"They may be here on a work visa or something like that," Heidger said, adding that ITIN mortgages are "a product that the community has rallied around because we historically haven't had an opportunity to provide those loans."
Current regulations make such loans appealing on the one hand, and tricky on the other. Enterprise expects to get credit under the Community Reinvestment Act for targeting an underserved market, and the loans could aid fair lending compliance. But ITIN loans typically fail to meet the requirements for qualified mortgages, often due to high debt-to-income ratios.
"The truth is, in our market it is hard to hit on both qualified mortgages and fair lending at the same time," said Stephen Marsh, Enterprise's chief credit officer.
Such regulatory confusion is concerning to James Bullard, the president of the Federal Reserve Bank of St. Louis. "I worry whether we're really choking off credit that would actually be perfectly fine to have and would foster economic growth," he said during a media briefing last month.
"You've got this chilling effect, where a banker is wondering whether he or she is violating this rule or that rule, or maybe they don't understand the rules well enough," Bullard said. "You end up with the bank not making the loan, which doesn't sound like a good outcome from a macroeconomic perspective."
Due diligence and prudent underwriting will play critical roles in the performance of the Kansas City branch. Vetting an applicant's ability to pay is particularly challenging.
"There isn't a traditional credit history because [the applicants] haven't been able to get loans anywhere," Heidger said. "So we'll look at nontraditional sources, such as rent histories, employment histories and other utility payments. They're paying taxes, so we're getting tax returns and that sort of thing."
Credit risk is another concern. Lenders have had to keep more ITIN loans on their books because they are typically nonqualified mortgages and the secondary market for them is weaker. Though many ITIN lenders have praised the performance of such loans with some industry observers quoting default rates of 1% to 3% during the financial crisis underwriting and location are critical components.
Mitchell Bank in Milwaukee, which has offered ITIN mortgages since 2003, was stung by the product. James Maloney, the $54 million-asset bank's chairman, said Mitchell learned a hard lesson from its decision to make ITIN loans with 95% loan-to-value ratios before the financial crisis. The bank now requires at least 25% to 30% down payment.
Another issue for Mitchell Bank is the location of many homes that serve as collateral for ITIN loans. In Milwaukee, those houses tend to be in older neighborhoods where prices continue to decline. As a result, he said about 10% of the ITIN mortgages Mitchell Bank made before the crisis went into default. Another 20% have required some type of modification, typically a reduced interest rate, to avoid foreclosure.
"It is not the ideal situation, but the alternative for the borrower and the bank are not so good," Maloney said.
Enterprise executives dismiss the notion that ITIN mortgages are an inherently high credit risk. "It is probably too soon to make a determination if the credit risk is better or worse, but my bet would be that it is better," Marsh said. The Hispanic community values "the credit product and they value owning a home."
ITIN mortgages are only part of Enterprise's Kansas City experiment, Heidger said. The branch, staffed by five bilingual employees, has already generated $1.7 million in outstanding loan balances and $1.2 billion in deposits. It is well on pace to hit management's expectations of having $2.5 million in loans and $1.8 million in deposits in the first year.
"It has gone fantastically," Heidger said.
Kansas City made sense for the initiative. Roughly 10% of the city's population is Hispanic, compared with just 4% in 1990, according to the U.S. Census Bureau. And its Hispanic community is three times that size of that of St. Louis.
"Kansas City has one of the largest Hispanic populations in the country," said Peter Benoist, Enterprise's president and chief executive. "And it is established."
Enterprise agreed to open the branch to honor a pledge it made to a Hispanic advocacy group to open a branch in a Latino community once it meaningfully expanded into mortgage lending.
That promise was made before the company bought Gorman & Gorman Home Loans from F&M Bank and Trust in Hannibal, Mo., in May 2013. Enterprise has eight branches in the Kansas City metropolitan-statistical area.