The Small Balance Intersection Update - August 19, 2024

Compliance Avenue

CFPB Releases 2025 Guide for Small Business Lending Data Compliance

The Consumer Financial Protection Bureau (CFPB) has published the 2025 Filing Instructions Guide (FIG) for small business lending, which serves as a critical resource for financial institutions required to submit data under the new small business lending rule. This guide details the necessary procedures and technical specifications for data collection and submission, focusing on key areas such as loan and borrower information. The instructions emphasize accurate reporting to ensure compliance with regulatory standards and to promote fair lending practices.

A significant aspect of the 2025 FIG is its guidance on the required data points, which include information on loan applications, loan decisions, and demographic details of small business owners. These data points are crucial for analyzing market trends and assessing the impact of lending practices on different communities. The guide also outlines the file formats, data validation requirements, and submission processes, helping institutions avoid common errors and ensuring the integrity of their submissions.

As the CFPB continues to focus on transparency and accountability in small business lending, the FIG is essential for institutions to stay compliant with the new standards. Financial institutions are advised to carefully review and implement the guidelines to streamline their reporting processes and mitigate the risk of non-compliance.

Read the full guide here.

Resilient Retail Road

Retail Shines Amid Post-Pandemic CRE Turbulence

The post-pandemic U.S. commercial real estate (CRE) market presents a mixed landscape with significant shifts across various sectors, as highlighted by the Brookings Institution. Retail emerged as the most stable CRE category, surprising many given the high-profile challenges it faced during the pandemic. Despite the decline in office and multifamily valuations—down 23.3% and 6.1%, respectively—retail property values continued to rise, reflecting its resilience. Retail rental properties have consistently generated competitive returns, even amidst macroeconomic challenges, marking a stark contrast to the volatility seen in industrial and multifamily sectors.

Nationally, retail vacancy rates are at a five-year low, underscoring the sector's robust performance. However, this success is uneven across regions, with substantial disparities in vacancy rates, particularly in majority-Black neighborhoods and downtown areas. The data indicates a critical opportunity for targeted investment in these underserved markets, which could spur economic growth and enhance property values. Notably, the increase in SBA 504 loan approvals for Black entrepreneurs—rising from 1.43% in 2019 to 2.97% in 2023—signals progress but also highlights the need for greater support to close the racial wealth gap in retail business ownership.

Read the full article here from the Brookings Institution.

Inflation Alley

Inflation and Job Openings Challenge Small Businesses Amid Economic Uncertainty

In August 2024, small business owners continued to grapple with inflation, which remains their most pressing concern, as rising costs eat into their profitability. Despite a slight decrease in the overall inflation rate to 2.9% year-over-year, many small businesses are still facing significant economic challenges, including an increasing struggle to fill open positions. In fact, 38% of business owners reported unfilled job openings, a slight increase from the previous month, highlighting ongoing labor market tightness. The Consumer Price Index (CPI) data showed a modest 0.2% rise in Core CPI, reflecting persistent price pressures excluding food and energy. While the National Federation of Independent Business (NFIB) Small Business Optimism Index improved by 2.2 points to 93.7, it still remains below the 50-year average for the 31st consecutive month, indicating that optimism is tempered by broader economic uncertainties.

The Uncertainty Index also surged by eight points to 90, returning to levels not seen since the pandemic, suggesting that small business owners are increasingly anxious about the future. However, the slightly cooler-than-expected inflation data, coupled with a weak jobs report earlier this month, has raised hopes that the Federal Reserve might cut interest rates at their upcoming meeting, potentially providing some relief in borrowing costs. Despite this, the economic environment remains challenging, with prices still over 20% higher than just a few years ago. As small businesses navigate these headwinds, the combination of inflation, labor shortages, and economic uncertainty continues to pose significant hurdles to their growth and stability.

Read the full report here – U.S. House Committee on Small Business.

Community Bank Drive

Navigating CRE Risks Amid Rising Margins

Community banks are navigating a complex financial landscape where rising net interest margins (NIM) are offset by increasing pressures from higher loan losses, particularly within the commercial real estate (CRE) sector. As the banks' fixed-rate assets reprice at higher rates, margins are expected to improve. However, these gains may be tempered by rising funding costs, especially when certificates of deposits (CDs) mature and customer balances reprice at current market rates. Deposit costs have peaked, and while some relief is expected with rate cuts projected for late 2024 and more substantially in 2025, the overall impact on funding costs will be gradual. The shift from noninterest-bearing deposits to higher-yielding alternatives has been significant, with noninterest-bearing deposits declining sharply, pushing their share of total deposits down to 23.1% by the first quarter of 2024, with a further decline expected.

The CRE sector poses a substantial risk, as community banks are particularly exposed to this asset class. Despite rising delinquencies, particularly in non-owner-occupied CRE loans, community banks have managed to keep these under control, largely through tightened lending standards and increased reserves. The stress within CRE portfolios is expected to intensify in 2024 and 2025, driven by the combination of higher interest rates, tighter credit availability, and lower occupancy rates post-pandemic. Regulatory pressures are also compelling banks with high CRE concentrations to raise capital and enhance their risk management practices. This regulatory scrutiny, coupled with market conditions, has led to a divergence in performance between larger banks and community banks, with the latter managing the challenges more effectively so far.

Looking ahead, provisions for loan losses are projected to rise significantly, reaching 16.0% of net revenue in 2024 and further to 20.7% in 2025, a considerable increase from the 11.5% level seen in 2023. Despite this, the overall impact on community bank earnings is expected to be moderate, with net charge-offs likely peaking in 2025 but remaining at manageable levels. The higher provisions reflect a prudent approach by community banks, ensuring they are better positioned to absorb potential losses without severely impacting their profitability. In summary, while community banks face headwinds from rising credit costs and funding pressures, their proactive management strategies and regulatory oversight are expected to prevent a severe downturn, allowing them to maintain stable earnings growth in the coming years.

S&P Global Market Intelligence. Read more.