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PCBB Banc Investment Daily November 20, 2013
Banc Investment Daily
November 20, 2013

Shining Light on Bottom Feeders

Bottom feeder is a term that generally refers to various species of fish that feed on the bottom of a body of water. There are invertebrates like sea cucumbers that fit this description, but most of us think perhaps of fish species like grouper and carp. A number of dinnertime favorites like halibut, flounder, bass, snapper and catfish also fit into this category. Most bottom feeders are detritivores, meaning they feed on decomposing plant and animal parts. This behavior is the primary reason that it's not considered very nice to call people or business sectors bottom feeders, so let's be classy and call them detritivores.
There are detritivores in almost every part of the economy and the financial industry has quite a few different species. Payday loan outfits, car title loan companies, pawn shops acting as bankers and specialty lenders who deal in subprime or low credit score borrowers.
There are certainly groups of borrowers that banks often can't help very efficiently, so there is nothing wrong in principal with other organizations picking up some of that market. Those that do may have experience and expertise in pricing for this kind of risk and it doesn't easily fit the banking system given all the regulations, but most still don't like it. As such, these organizations are of interest to the CFPB who is looking at debt collection practices in order to build a set of comprehensive rules to govern collections. They want to be sure everyone operates with full understanding of the rules and that consumers are informed and treated fairly.
The CFPB is gathering input in a unique way, in collaboration with Cornell University's Law School. The staff and students at the school have set up a website at in order to gather comments with the objective of removing barriers to public participation; this is a good first step.
The attention from CFPB is also timely, as we are seeing some pseudo-lending organizations branching into new areas. Slowdowns in the subprime mortgage sector due to higher interest rates are causing margin compression so many nonbanks are moving into new areas. These detritivores still swim in other ponds, as they accept car loans and do other lending activities. In fact, studies find the mid-market non-prime auto loan market (with credit scores between 525 and 675) makes up about a third of the $800B auto financing market.
As your bank comes across potential customers who don't qualify for a loan at your bank, maybe it makes sense to make a referral to a quality institution that can help them. You have to be careful when you do, but some lenders can take smaller loan amounts & lower credit scores as they avoid the detritivore label.
There are no doubt detritivores who end up a delicious filet of halibut, but for the most part, this sector of the financial industry preys upon the weakest and gives all financial institutions a bad name. Community bankers can play a strong role here and help their communities thrive and prosper. Providing education that will help your customers avoid bottom feeders is just good business, so shine your light through the murky financial ocean of complexity that surrounds the community to help customers and potential customers alike.