Among the institutions that took criticism was Wells Fargo, the fourth-largest United States bank and the biggest lender to small businesses. But Marc Bernstein and Douglas Case, the bank’s two top executives for small-business lending, say the criticism was misplaced. In 2010, the bank made $14.9 billion in new loans to small companies, “just shy,” as Mr. Case put it, of a $16 billion goal for the year but more than the $14.5 billion it lent in 2009. In the first quarter of this year, the bank lent $3.7 billion, a 27 percent increase over the first quarter of 2010.
Wells Fargo, like many banks, defines a small business as any company with less than $20 million in annual revenue. But, said Mr. Bernstein: “Wells Fargo historically has put an awful lot of focus on lending to the smallest businesses. That’s why we’re the largest lender in loans under $100,000.”
Mr. Bernstein and Mr. Case spoke recently about lending through the economic crisis and maintaining the bank’s ties with struggling — and angry — customers. This is a condensed version of the conversation.
Q. Why has it been so difficult to approve loans?
MR. BERNSTEIN: First of all, a lot of businesses entered the recession with a great deal of debt. There was a 33 percent increase in the small-business loan balances nationally, between 2005 and 2008. Now that had grown slowly for years, but all of a sudden banks really went hog wild in terms of loaning to small businesses. Then, in some industries we saw sales fall as much as 30 percent. Now, imagine that small-business owner: they’re carrying much more debt than they’ve ever had, sales fall 30 percent, they have negative cash flow, they’re drawing down their reserves. It is highly likely they’re not going to survive another six months or 12 months in a scenario like that, and that’s the sort of thing we were dealing with at the height of the Great Recession. There were people coming to try and borrow more, who already had no visible means of being able to pay their existing debt.
Q. In the past, you have emphasized the consumer debt some of these business owners were carrying.
MR. BERNSTEIN: We saw that in what I call the bubble markets — Phoenix, Las Vegas, Southern California, Florida — a lot of small-business owners borrowed against their house to do whatever. Sometimes to expand their business, sometimes to do what other consumers did, to buy boats and other things. So when the real estate market collapsed, those people were in a very precarious situation as well.
Q. What happened to them?
MR. BERNSTEIN: Well, many businesses have closed in the Great Recession, and many bank loans to small businesses were charged off. The good news is that increasingly the small-business owners who have survived are having an easier and easier time paying their debts.
Q. How much of the Wells Fargo small-business loan portfolio had to be charged off?
MR. BERNSTEIN: From what I see from industry statistics, substantially less than our competitors. If you look at Bank of America’s quarterly earning statements, you’ll see that their charge-off rates got quite high for a while.
Q. Bank of America’s chief executive called his small-business portfolio a “disaster.” Was yours?
MR. BERNSTEIN: Not in my mind. Without meaning to criticize one of our fellow banks, our loan losses never got anywhere near, never approached even the neighborhood that Bank of America reported.
Q. Did you set a lending goal for this year?
MR. BERNSTEIN: We intend and expect loans to increase, but how much will depend on the economy. That’s one of the things that surprised us last year: the economy did not recover quite as quickly as we’d hoped, and loan demand didn’t recover quite as quickly as we hoped.
Q. How is your approval process different now than it was, say, a year ago?
MR. BERNSTEIN: I can tell you how it’s been different from two or three years ago. We use credit scoring — Wells Fargo was the pioneer in the United States in using credit scoring for small business, and it was a way to help us make more small-business loans than we were able to make before. But we have lenders looking at more decisions than we’ve ever had lenders look at before. It’s worth the time for a lender to save applications that the scorecard says are not quite good enough, people who maybe didn’t pass the cut-off score, but are not far from it. By the same token, sometimes the lenders look at applications that score high but have some serious problem.
Q. How does credit scoring work?
MR. BERNSTEIN: Credit scores are developed by looking at thousands of actual experiences where lenders made loans and determining what characteristics of the applicant predicted their likelihood of default. You look at 50 or 70 characteristics or more of an applicant — variables related to credit history, and also aspects of the business itself — and then you mathematically determine how does each of those contribute to the likelihood of going to loss.
Q. How often does an application that gets a second look end up getting approved?
MR. BERNSTEIN: That’s proprietary, but often enough that it’s worth our while to do it, and it’s a lot of peoples’ time.
Q. The financial industry market researchers Greenwich Associates surveyed small-business borrowers and found that the biggest banks not only failed to keep ties to small borrowers, they often actively severed them. Do you think Wells Fargo has to re-establish trust with the small-business marketplace?
MR. CASE: We never retreated from small business. And not to talk about competitors, but if you look at different approaches to small business, some came and went, and came back again, or will need to come back again. We’ve always been dedicated to this space, and this customer segment.
MR. BERNSTEIN: We are cognizant that the situation was ripe for people to feel like we weren’t serving them, and we tried to do whatever we could reasonably do to help our customers — and be very conscious of the fact even the customers we were calling to collect were often good people having tough times.
Q. Do you understand why so many small-business owners seem to feel big banks got a bailout and then did nothing to help small businesses?
MR. BERNSTEIN: A lot of people who frankly are not very good credit risks and who want a loan, I can understand their frustration. But Wells Fargo has been committed to small-business lending for a quite a while now, and we know here that we don’t help our customers, our communities or shareholders by declining a good loan.
Q. We get a lot of comments from readers who feel they have been mistreated by their banks, and some of them name Wells Fargo.
MR. BERNSTEIN: That’s hard to understand, because we’re definitely doing more small-business lending than other banks.
MR. CASE: We’re doing everything we can to say yes to every single loan that’s possibly approvable.
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