Bring Back Bob the Banker

If you’re over 40 years old and didn’t grow up in the big city, you knew Bob.

Bob was a local banker. He lived in the same town where his bank was. He was a loan officer, probably a Vice President, and worked for the bank for years. Bob married his high school sweetheart, raised four or five kids in the town you lived in, belonged to the local optimist club, and attended a local church every Sunday. Bob showed up at most of the civic events in town. You saw him at many of the weddings, christenings, and funerals in town too. Bob knew everybody who was anybody in your town. He also knew a lot of nobody’s as well, but that didn’t matter to him – anybody or nobody, you were from his town and he was the banker.

Bob viewed himself as the guardian of the bank’s money, and the reputation of the bank in the local community was very important to him. When people needed money, they would come to Bob to apply for a loan. There was paperwork to fill out, but it usually wasn’t very extensive. Bob looked at the paperwork to be sure, but Bob knew you, he knew your parents, he knew where you worked, and he knew how much money you made.  Most importantly, Bob had a pretty good idea what sound financial practices were and he cared about your financial well-being because it was tied to his bank’s reputation.

If you tried to borrow money to buy a house or a car you couldn’t afford, Bob would take you aside, puffing on his cigar, and say, “Son [a term applied to all males under 50 years old, sic] there’s no way I can loan you this money because you can’t pay it back. If I have to foreclose on you, my name will be mud in this town…”

Granted, not everything about the Bob’s of this world was good. His typical response to women (“Aw honey, why don’t you come back with your husband to apply for this loan?”), , single women (“can’t your father front you the money for this sweetheart??”), and minorities (“We don’t loan to people buying houses in that neighborhood…”) left a lot to be desired.  But Bob (and more importantly, Bob’s bank) had several characteristics that were lost in our frenzy to deregulate the financial industry; (1)They knew who they were lending money to, and (2) Their financial well-being and professional reputations depended on making good loans that people could pay back.

In making presentations to elderly residents in retirement communities over the past few years, many of them knew Bob or used to be a “Bob” themselves. When they talk about debt, bankruptcy and financial burdens on families now, they don’t talk about overspending (“my kids think money grows on trees”), or  lack of responsibility (“my grandkids are spoiled rotten!! They should get a job and work for living!”) they talk about the demise of Bob the Banker. There are no local bankers to help us with our loans, credit cards, or anything else. The entire concept of due diligence has been thrown completely out the window, leaving the consumer to fend for themselves.  Many of these elderly residents lament the state consumers find themselves in but they admit that, back in the day, there was someone watching out for them.

Bob the Banker is gone to be sure.  But at least some of the seeds of reform for the U.S. credit and debt system lie with the system Bob came from. Those who make loans should hold some of the risk. They should also evaluate whether the borrower can pay back the loan. The loan terms should make sense to both parties (not just the financial MBA who drew up the fine print). There should be financial and reputational penalties for issuing non-performing loans. Is that really too much to ask??

Comments

[David Shemano]

The answer to your question is contained in your post, where you say "not everything about the Bob’s of this world was good" and then cite Bob's treatment of women and minorities. What made Bob "Bob" was his ability to use discretion based upon experience, judgment and intuition free of legal consequence, which inevitably included consideration of sexual and racial factors. Currently, as a matter of policy, we deem the exercise of such discretion as inherently irrational and/or improperly "prejudicial," especially where the discretion is based in part upon sexual or racial factors or has a disparate sexual or racial impact. So no discretion, no Bob, and since we essentially prohibit discretion, no Bob.

[Leo Petr]

What's your take on the Canadian system with our six big retail banks (CIBC, RBC, Scotia, BMO, TD, and I think Desjardins in Quebec) coast-to-coast? This is very different from the US, which I understand has thousands of tiny banks still.

They issue most of the mortgages in Canada, but none of them seems even close to going bust, partly because they have very modest leverage compared to every other big bank in the G8, and partly because of the very pre-emptive buy of $25B in mortgages by the federal government from the banks in October 2008.

There haven't been any small banks in Canada for decades, and there doesn't seem to be any problem that would require disassembly into small banks here.

[Leo Petr]

@David: Discretion isn't prohibited. I am pretty sure US banks are free to discriminate based on relevant factors like credit scores, income, and employment history. Not lending to someone because other people with the same general appearance have had poor repayment performance is moronic and irrational.

Also, blaming this crisis on lending to minorities is bullshit. The house of cards would have crashed even if no-money-down, 110%, negative-amortization, 40-year, subprime mortages were only being issued to white males with beer bellies. The plurality of them sure as hell were.

AFAIK, the problem was in the separation of risk from profit due to the mortgage broker/retail bank/investment bank separation coupled with confusion of independent risk from systemic risk -- the assumption that all mortgages cannot go belly-up at the same time, even though that's exactly what they do in a recession.

[Ryan]

There SHOULD be financial and reputational penalties for issuing non-performing loans, as Kevin states. Bob the Banker was still doing business in my hometown while I was growing up in the 80's and 90's. He gave me my first loan to buy a car. His office is still open today. The small banks that only sold regular prime mortgages to people who were a good credit risk, and kept those mortgages on their books, have by and large avoided much of the financial ruin that has befallen many of the nation's large banks. And I do not think that Kevin is arguing for a mandatory return to small banks and a 1950's era financial system, but for some return of the responsibilities of that era. What are the repercussions, social, regulatory, etc., in Canada for a bank or banker who makes irresponsible loans, Leo?

[Raymond Bell]

While Bob the Banker in the 80s and 90s seems to lend an era to understanding the community. However, since I was in a community during the 60s and 70s the Bob the Banker extended credit only to those who had above average income and no blemishes on their credit records, thus Bob may have been a good banker, he often drove consumers to my world called loan companies where interest rates were higher and when the loan company turned down the consumer, they often went to pawn brokers and loan sharks. History may be repeating itself.

[Mike Dillon]

The concept of "Bob" is great. And, from my purely anecdotal experiences and conversations, it appears that "Bobs" are the place to go if you want to be treated fairly and CONSISTENTLY fairly. That means small, local banks and credit unions.

The issue in comparing Bob to everybank today is that, back when Bob was doing business there was no securitization of loans. No one ever had to deal with it until Lewie Ranieri et al started playing with things in, what, the late 80's? Until then, at least, Bob had no choice but to keep his loans on his own books. As much as Bob was "helping" the community by making "solid" loans, Bob was also being kept honest because he had no choice but to deal with those loans for their entire history.

"If I have to foreclose on you, my name will be mud in this town…" That's evidence right there. Bob was concerned for his business reputation as much as anything else. That doesn't seem to exist even at the "Bob" levels in many mortgage brokerages these days - I would venture to say due largely in part to securitization. I personally knew one broker who opened and closed at least THREE shops here within the 2-3 years that I knew him. No concern for the community. Things started going south with the business for one reason or another, pipelines dried up, etc, no problem. Shutter the place and head for the Secretary of State's office with a new business name. Back before I had any clue about the industry I even helped him move one of his offices from location A to location B.

Unfortunately, until and unless the reins are pulled WAY in on RMBS, and things become either incredibly transparent or federal regulatory entities actually decide to do their jobs and start prosecuting criminal actions, OR a Bob continues to keep his loans on his books for the life of the loan (which some smaller banks still do) the consumer is going to continue to be the prime rib floating in the shark tank....

[nick]

I think you're romanticizing a bit too much about Bob the banker (or Joe the plumber or whatever his name is). I checked the FDIC website for banks that have failed in 2009. There are 53 listed, not to mention the ones that failed last year. Honestly, I didn't recognize more than a handful of names. They're almost all small community banks like First State Bank of Winchester or First National Bank of Anthony. Now I'm not sure exactly who Anthony is or how he got his own bank, but he didn't exactly do as good of a job in real life as Bob the banker did in your story.

[Russ]

It would be nice if Bob the Banker came back. However, there is no Bob the Banker (or very few at least) because consumers in general want the cheapest rates. Bob wasn't the cheapest and never will be.

So until consumers stop obsessing over .125% in interest rates or if Wal-Mart's socks are 50 cents cheaper than their local store, then all of the small companies whether it be Bob the Banker, Bob the Mechanic, Bob the CPA, etc are going to be an endangered species.

I am so sick of dealing with call centers, employees that don't give a shit, big companies, that I have decided to try to eliminate using them the best I can and patronize smaller business whenever possible.

[Adria Huang]

Part of the reason banking reforms have moved away from the era of Bob the Banker is the need to control the discretion exercised by loan officers and introduce an element of objectivity in the loan origination process. Look at the Basel II reforms which focus on risk rating systems in relation to the evaluation of obligors and facilities using uniform metrics (while allowing for some subjective criteria and overrides in certain cases). There are implementation issues and problems with managing compensation schemes which focus on origination volumes. However, I think most of us should be able to agree that the pure exercise of subjective discretion alone by loan officers is not the ideal solution.

[Russ]

Adria:

I agree, but I would also argue that lack of subjectivity is part of why we are in this mess too. Underwriting has gone from truly evaluating each file on its merits to making every loan fit in a rigid box and we have eliminated any measure of common sense. As a result, every loan officer can give you examples of millionaires being denied loans they don't even need to deadbeats getting approved with no problem. Efficiency in the name of lower costs as well as eliminating any hint of discrimination has resulted in a mindless origination process that focuses more on the process itself as opposed to true credit risk.

[Architect]

You need to know that the chairman of Corus Bank lives (lived) in the same town as his bank defacto headquarters - River Forest, Illinois, an immediate suburb of Chicago. Executive Vice President of Commercial Real Estate (who also serves as Chief Credit Risk Officer) likewise lives in River Forest. Oh well, so much for the hometown banker...

[CathyG]

You can still work with Bob's bank. It's your local credit union. They know you, your kids, your story and never sell a mortgage. We've been with our credit union for 22 years and wouldn't go back to a big bad bank for anything.

They only have one branch which we visit twice a month on payday because it's not too conveniently located. On the positive side, we're not paying for thousands of branches and ATM's we'll never visit and tens of thousands of employees we'll never speak to.

And they actually seemed happy when we paid our mortgage back early.

[mark]

One of the main jobs of Bob was to make residential mortgages. But once Fannie Mae and Freddie Mac came along, they told Bob what kind of loans to make, in most cases. Then, beginning around 1995, Fannie Mae and Freddie Mac rolled out computerized mortgage evaluator programs that made Bob's experience even more irrelevant.
Maybe the private sector would have gotten there anyway - for example, in credit cards, they basically did - but let's recognize that it was a government sponsored entity created in the Great Society that was behind much of what you lament.

[Barbara]

Great site. And when the credit card industry implodes we will go back to the basics. Job and payment history of the bills were the basics and how my grandfathers bought their homes. "Bob" is very real and believe me I have thought about having my own bank.

[JimmyDaGeek]

I like the idea that any financial organization making a loan must have some skin in it and can't sell all of it to unsuspecting suckers. Sure, it will decrease the availability of credit, but it will also make sure that the banks selling this crap have a stake in what they loan to whom, and not just rake in the fees.

Some community banks went under because they bought some of the sub-prime paper for their own income investments and then had to try to raise more cash when the paper lost 80% of its value, so did their net worth. These banks thought they were doing the prudent thing and got screwed by the big boys.