No Credit… No License… No History? No Problem?
Even before our current mortgage meltdown, most banks would never touch a prospective customer with any one of the above issues, let alone all three. But there’s one bank in a quiet little corner of Pennsylvania that’s made thousands of loans - all to customers who have no credit history, zero credit scores, no driver's license and nothing beyond an eighth grade education.
The most amazing part is that they’ve never had even one customer default on a loan. And that’s thousands of customers over a 20-year period. How can this possibly be true?
A number of reasons…
This bank strictly adheres to one of the most basic principles of solid banking, and one we can all understand: Know your customers well, and only lend money to people you know can afford to pay you back. Sounds like a bank you’d like to do business with? It gets even better - the banker goes to the customers, meeting with them right in their homes.
These customers are a dream-come-true for a bank-lending officer: They live well within their means, save a lot, and don’t have credit cards.
If you’re scratching your head about where this bank does business, I’ll give you a hint: It isn’t overseas or in a foreign country. It’s right here in the United States, and there’s a way for you to benefit from these dream customers.
Unique Loans, Unique Customer Loyalty
If you’re from Pennsylvania, you’ve probably guessed by now I’m talking about the Amish. And in the Old Order Amish Community of Lancaster County, the banking system is working just fine.
Hometowne Heritage Bank, a division of National Penn Bank (NASDAQ:NPBC), has offices in the heart of Amish country, and is the biggest lender to the Amish. Even the drive-up lanes have a special lane for horse-drawn buggies only. More on Hometowne in a minute, but here’s a brief history of the Amish for those of you not familiar with them.
The Amish, members of a Christian denomination called Anabaptist, first came to this country in the early 18th century to avoid persecution in their native Switzerland. They refer to themselves as “plain folk.” They’re best known for simple living, plain dress and for shunning modern conveniences, such as automobiles, tractors and electricity.
They are a hardworking people, leading mostly simple farming lives. As of 2008, they number around 227,000 mostly in the United States and Canada. Strict-order Amish seek to limit contact with the outside world. And they’re low maintenance: They never buy insurance and don’t accept any government assistance, such as Social Security or Medicare.
For daily living expenses - including buying the horse-drawn carriages they typically use for transportation - they pay by cash or check. They would never think of buying things like shoes, clothing or food on credit.
The only time they vary from the no credit rule is when they’re buying a farmstead. The problem is that there aren’t any Amish bankers, or Amish-owned banks, so they have to deal with local banks run by “English.”
According to National Public Radio’s David Gilkey, the one that stands out above the rest is Hometowne’s Bill O’Brien. Ninety-five percent of his customers are Amish, and he racks up nearly 1,000 miles a week visiting them.
Bill oversees about $100 million in loans, and he’s used to no credit score, no driver’s license customers who contact him about buying a farm. According to Bill, “I’ll find out who his dad is, and I’m also interested in who his father-in-law is. It takes a team to make a farm go. We’ve never lost any money on an Amish deal.”
Once an Amish man becomes a customer, Bill doesn’t worry about them missing a payment. The Amish feel that missing a payment brings shame… not just on the borrower and his family, but on the entire Amish community.
And unlike a lot of mortgages that are sold or securitized, Amish loans have to remain with the originating bank. An odd quirk in banking law states that mortgages on homes without electricity or commercial insurance can’t be securitized or sold.
As a result, Hometowne services all its loans and the system is obviously working: The company just wrapped up its best year ever. Hometowne’s parent, National Penn Bank, is doing just fine, too.
Its third-quarter income rose 14% over last year, and the company raised its cash dividend for the thirty-first consecutive year. In early 2008, it acquired two smaller regional banks and is now one of the largest regional banking operations in eastern Pennsylvania, with 127 offices available to serve its customers.
In this tumultuous year that’s seen nearly 30 banks fail and many others taken over and sold by the Fed, it’s refreshing to find a place where someone actually knows how to run one. And even more refreshing, happy customers who know how to live within their means.