If you ever wanted to know the most popular strategic planning initiative for a bank over the last 3 years it is this one – generate more non-interest income. An estimated 30% of banks have this as their focus. The funny part is that despite this being a major conversation and the source of many meetings, most banks don’t take care of the basics. Today, we will highlight the 12 best ways to generate more fee income when it comes to commercial lending (in no particular order).
- Update Your Fees – When is the last time your bank changed its loan fees? It has probably been a while, if ever. Some banks we have surveyed have not changed their fees in more than 15 years. Your costs have gone up and will continue to rise. Even if you can get another $15 per item, that all adds up.
- Late Document Fee – Late rent rolls, financials, tax returns and alike are a major problem in banking. This is an area ripe for electronic connection to eliminate this issue altogether and cut servicing costs. However, if you are not going to go down this path, then you should charge a fee for non-compliance since not having the required documents increases credit risk and servicing cost. According to one bank’s attorney, with 10,000 commercial loans, they charged fees after 38, 68 and 98 days and ended up collecting an additional $1.4mm per year.
- Past Due Fees – While we all have a default rate built into our loan documents, few banks actually exercise it. Automatically charge the default rate when past due and then if and when the customer complains, charge a fee to reverse it since it is extra work. Not only will you create a new revenue stream, but you will find that your past dues go down as well. This fee also separates those that have administration/organizational problems and are late versus those that have credit problems and are late.
- Document Fees – Check with your state on exactly what to call this fee since there are some restrictions, but non-standard loan documents should come with an additional fee to compensate the bank for the added complexity of a transaction. Then again, if you are not charging an upfront fee (and even if you are), you might consider including just a document fee for even your standard documentary structure. As a side note, if you want to reduce costs, give your loan administration a quarterly bonus if they keep their documentary exceptions below 15%. Maybe you can even tier it for under 12.5% and 10%. Whatever the structure, paying a suitable bonus is cheaper than having to manage exceptions and track down borrowers once they get out of hand.
- Document Modification Fee – Many banks are still not charging for loan modifications that are done at the borrower’s request. Changing names, swapping/releasing collateral, or restructuring terms all require time and effort.
- Credit Analyst/Collateral Verification Fee – Multiple types of collateral or esoteric collateral types (we once made a loan on Llamas) create additional work in administration. Some banks charge a fee for both collateral verification and for collateral maintenance on a per item basis.
- Non-Payment Defaults/Covenant Issues – Any time there is a non-payment problem or covenant breach, loan administration/credit admin has to spend time and effort solving the issue. Some banks charge a set fee on the current outstanding balance to compensate. Of course, you have to be careful that an additional fee does not impact credit but that is easily done.
- Capital Savings – For certain lines of credit and short term loans, insert the language that the bank reserves the right to terminate the facility “at any point and for any reason” and the loan becomes a 0% risk weighted item saving you significant capital allocation. This takes a little borrower education to give them comfort that you are not going to yank the line out from beneath them, but if you explain how the regulatory capital allocation works, most will understand. If they don’t like it, charge an additional 20 basis points in fees to compensate for the difference in capital and give the borrower the option.
- Hedge Fee – You create a fixed rate loan and you hedge it with a third-party provider. Here, you structure an additional spread in the rate as a referral fee and you can monetize the present value of that amount. The key part here is that the borrower doesn’t view this as an additional fee. If structured correctly, you can take this into income the month of closing as a lump sum. Similar to a SBA guarantee sale, this one tactic can generate hundreds of thousands of fees per month for a bank.
- Fixed Rate Amendment Fee – Similar to a loan amendment and hedge fee, this fee is charged when the borrower needs to change the terms of the loan and your bank needs to restructure the associated hedge. An additional spread can be included in pricing, if market conditions allow, and can be monetized in the month of amendment.
- Rate Lock Fee – Sometimes the borrower would like to hold their loan rate firm for a period of time while they get their act together. Here, the bank can lock the rate and include an additional spread that can be monetized or fee for the service. Very few banks offer this feature and it is an excellent way to differentiate your bank.
Of course, you should check with your accountant and legal counsel before instituting some of these fees but many of these are overlooked by banks and are a healthy source of non-interest income.
Charging Your Customers
If your reaction to most of the above is “we don’t want to gouge or “nickel and dime” our customers we hear you and your customer reaction should be a consideration. However, before you reach that conclusion, consider that many banks lack adequate pricing models that take into account the cost of servicing the loan and many models that don’t fully allocate the appropriate cost. As a result, banks would be shocked to know that maintenance and the associated operational risk for some customers can easily eat up 1% to 2% of a loan’s amount. With net interest margins going below 3% for the industry, maintenance cost can be a sizeable portion of that profit. Charging customers in accordance to the time and resources they eat up allows banks to lend at more competitive rates. Thus, these fees force a more equitable and economically-driven application of capital.
Go pull your loan documents and see how you stack up against this list of fees. Chances are there is at least one or two on this list that can end up generating new found revenue for the bank and end up helping get that ever popular “more fee income” initiative off the priority list.
Submitted by Chris Nichols on April 04, 2016