Profile: Harrington Bank

Harrington Bank, a new thrift from Chapel Hill, North Carolina, runs against the current. In 2008, when most banks were restricting credit and making only prime loans, Harrington continued with a policy of providing loose credit and high cost, subprime mortgages.

In 2008, when only about 11.6 percent of mortgages were made at sub-prime interest rates, fifty-seven percent of Harrington’s loans were high cost.  That is an outstanding difference, particularly for a small bank with an OTS charter. Harrington is not a fly-by-night lender working through mortgage brokers.

Harrington did not deny even one application for a mortgage loan in 2008, according to their 2008 Home Mortgage Disclosure Act (HMDA) data.

Harrington serves real estate investors.  More than 65 percent of their loans went to such borrowers. That is in contrast to the larger market, where fewer than one in seven loans went to a non-owner occupant borrower.

The larger story here has to do with the myth that surrounds small banks. Small banks have a favorable reputation.  I’m not sure if they deserve it.  I hear it all the time.  They state they never participated in the sub-prime lending era.  They talk about their ability to provide personal service to their customers.  They say that they know their communities better than those big banks.

Many investors seem to agree with that broad blanket statement.

Still, the story at Harrington Bank shows that this is not always true.

It is not unusual for the small bankers to present themselves not a perpetrators of the subprime crisis, but as victims. Michael Menzies of Easton Bank & Trust testified to Congress in April 2009, on behalf of the Independent Community Bankers Association, that small banks were suffering from the lack of liquidity in the banking system.

He derides large banks for not verifying income on loans: “Most community banks are very conservative in their underwriting practices, and a consumer’s documented ability to pay is a central part of underwriting their
loan…Community banks base their credit decisions on a customer’s documented ability to pay,” he said, “and they do not engage in robbing their customers of equity
in pursuit of fees.”

Yet, at Harrington Bank, almost more than half (42 of 77) of originated loans show no evidence that borrowers had to report their income.