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Tag Archives: Lending

Regulators Issue Statement on Lending to Creditworthy Small Businesses

On February 5, 2010, the federal banking regulators and the Conference of State Bank Supervisors issued an Interagency Statement on the Credit Needs of Creditworthy Small Business Borrowers.  The Statement builds upon principles set forth in the October 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts.  After noting the overall decline in loans to small businesses and the reasons for that decline the regulators suggested that lenders may have become overly cautious with respect to small business lending.  They encourage lenders to engage in prudent small business lending and that that examiners will not criticize lenders for working in prudent and constructive manner with small businesses.

The decline in small business lending has many reasons, not the least of which is that loan demand is actually down.  Lenders are also naturally cautious of lending to those businesses that are reliant solely on cash flow that has slowed due to the slowdown in consumer spending and the decline ion the personal wealth of the owners of the businesses.  Despite the assertions to the contrary by the regulators, lenders are concerned that there is a disconnect between statements from Washington, DC and what actually happens in the field when examiners are onsite at financial institutions.  Our experience seems to show that local federal regulators do not see any upside in being flexible when faced with making decisions about how to rate credits.  Lenders are therefore naturally reluctant to maker decisions based on guidance until they see it actually implemented on the ground.

Email This Content Email This Content Posted in Bank Regulations, Commentary, Small Business. Tagged with , , , , . By Jerry Blanchard - Monday, February 8, 2010

State of the Union – TARP Money for Community Banks

In his January 27, 2010 State of the Union address, President Obama renewed his call for using some of the TARP money for community banks in an effort to drive small business lending.

So tonight, I’m proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat.

This proposal would be consistent with President Obama’s speech last October in which he stated the broad outlines of a new program to provide additional capital to community banks in an effort to spur lending to smaller business, as well as Secretary Geithner’s extension of the TARP program.

We understand that government officials have indicated that additional details on the program will be rolled out by Treasury officials in the coming days.  We have previously analyzed the known terms of such an expansion, based on the guidance provided last October.

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Email This Content Email This Content Posted in TARP Capital. Tagged with , , . By Rob Klingler - Thursday, January 28, 2010

Policy Statement on Prudent Commercial Real Estate Loan Workouts

Regulators and financial institutions have been trying for some time now to come to an understanding of what type of how workout strategies affect the classification of loans and the corresponding impact on estimates of loan losses. On October 30 the federal banking regulators published guidance on prudent commercial real estate loan workouts that addresses these issues. The guidance addresses some of the most contentious areas of disagreement between banks and examiners.  One of those areas is the impact of a decline in value of collateral in situations where the borrower or guarantors have the ability to service the loan. The new guidance tells examiners that renewed or restructured loans to borrowers who have the ability to repay their debts according to reasonable modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance. This is a significant change from the manner in which examiners have been classifying acquisition and development loans in the past and time will tell exactly how the examiners will in fact deal with such loans in the future.

A problem loan workout can take many forms, including a renewal or extension of loan terms, extension of additional credit, or a restructuring with or without concessions.  The key to any loan workout is that the renewal or restructuring should improve the lender’s prospects for repayment of principal and interest and be consistent with sound banking, supervisory, and accounting practices.

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Email This Content Email This Content Posted in Bank Regulations. Tagged with , . By Jerry Blanchard - Sunday, November 1, 2009

Georgia DBF Explanation of Lending Limit Changes

As we’ve previously discussed, the Georgia Department of Banking and Finance had proposed to modify the way in which loans to related entities are treated, among other changes.  No material changes to the proposed rules have been made, and the new final rules are effective on September 7, 2009.  The new final rules are available from the DBF’s website or directly here.

The new rules, effectively consolidating many related party loans, may cause the consolidated relationships to become in technical violation of Georgia’s loans to one borrower rule upon renewal.  However, the DBF, in recognition of the current economic environment, has allowed for a transitional phase for loans that were previously made and separately remain in compliance with the DBF’s prior rule on an unconsolidated basis.  Those loans should be reworked to comply with the new regulations if feasible, but will otherwise be treated as grandfathered under the prior rules.  So long as such loans are modified or renewed by the bank without any additional extension of credit, the loans will not be cited for a violation of the Georgia legal lending limit.

The DBF has NOT provided any relief from loan to one borrower issuers in the context of declining legal lending limits due to reduced capital.  Under the Georgia regulations, where the bank’s statutory capital base is reduced for any reason, existing debt which was in conforming with the legal limitations at the time it originated are not construed to be non-conforming with new legal limitations resulting from the reduced statutory capital base.  However, extensions, renewals and rollovers are generally considered to be a new loan, and must conform to the new, lower lending limitations.

In the current economic environment this places banks in an untenable situation because borrowers are unable to pay off the loans due to a lack of liquidity and no other financial institutions are willing to take over the credits.  There are few options left for a bank in such a situation; e.g., enter into some sort of forbearance agreement with the borrower.  The result of that, however, is that after 90 days the loan will need to be downgraded to substandard, regardless of whether the borrower is able to keep interest payments current.  We have had extensive discussions with the Georgia DBF on this issue, focused on the OCC rules, which permit extensions or renewals in this situation.  However, the Georgia DBF has stated that it will not modify its position at this time.

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Email This Content Email This Content Posted in Bank Regulations. Tagged with , . By Rob Klingler - Thursday, September 3, 2009

Georgia DBF Clarifies Guidance on Loan Renewals

Georgia Department of Banking and Finance Commissioner Rob Braswell has advised us that the Department’s announcement last week was intended to provide relief only in the context of “loan stacking” under the Department’s proposed new Rule 80-1-5-.11.  Accordingly, the Department will permit renewals of loans which had originally been made in conformity to the loan to one borrower, but would otherwise not be in conformity with the loan to one borrower rule solely due to the the Department’s proposed new “loan stacking” rules.

Renewals and extensions of loans where the loan to one borrower issues arises solely because of capital losses since the loan was originally made are NOT covered by the Department’s announcement.  We are continuing to pursue this issue with the Department, but in the meantime, our recommendation is that banks should NOT extend or renew loans to borrowers where the extension or renewal would violate the loan to one borrower rule as a result of reductions in the limit resulting from capital losses.

Email This Content Email This Content Posted in Bank Regulations. Tagged with , . By Jerry Blanchard - Monday, August 10, 2009

Georgia DBF Provides Guidance on Legal Lending Limits for Loan Renewals

The Georgia Department of Banking and Finance (“DBF”), announced today a significant change in the way in which the legal lending limit will be applied in the context of loan renewals.  Due to a shrinking capital base, a large number of banks have been struggling with the issue of what to do with loans whose renewal would cause a violation of the legal lending limit.  These were loans that met the requirements when the loan was made but could not be made today due to the bank’s smaller capital position. The position of the DBF has been that a bank should not renew such a loan.  In the current economic environment this places banks in an untenable situation because borrowers are unable to pay off the loans due to a lack of liquidity and no other financial institutions are willing to take over the credits.  The only option left for a bank in such a situation is to enter into some sort of forbearance agreement with the borrower.  The result of that, however, is that after 90 days the loan will need to be downgraded to substandard, regardless of whether the borrower is able to keep interest payments current.

Following direct discussions among GBA President Joe Brannen, GBA counsel Walt Moeling and Jerry Blanchard, Commissioner Rob Braswell, and the DBF Staff dealing with this issue, the DBF announced today that it shall be the position of the DBF that if loans are modified or renewed by the bank without any additional extension of credit outstanding, such loans will not be cited for a violation of the new rules of the Department contained in Rule 80-1-5-.11.  The DBF goes on to note, however, that the fact that a violation of the lending limit rule is not being cited should not be interpreted as a finding of creditworthiness by the DBF. A decision to classify a credit or credit relationship is an independent process from the application of statutes and rules.

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Email This Content Email This Content Posted in Bank Regulations. Tagged with , . By Jerry Blanchard - Thursday, August 6, 2009

SIGTARP Survey Results

On July 20, 2009, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) published the results of the SIGTARP Survey of Initial TARP Capital Purchase Program Recipients.  Despite the report’s flaws, some of which are discussed below, the results should be read by all TARP recipients.  The report does a good job summarizing how banks use capital (see in particular Appendix B) and exploring the myriad of ways in which TARP funds have been used.

Report Conclusions

Titled “SIGTARP Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP Funds,” the report recommends that Treasury require TARP Capital recipients to submit periodic reports to Treasury on the uses of TARP funds, including what actions they were able to take that they would not have taken otherwise.

The actual results of the survey, however, would seem equally to support a conclusion that, because TARP funds are capital, the specific uses of TARP funds cannot be specifically identified.  Instead, the TARP Capital Purchase Program has provided additional capital to banks to allow them to continue to engage in all of the activities in which they engage in, including lending.

Disclosure of Individual Responses

The SIGTARP report aggregates the responses of the 360 bank recipients of TARP funds through January 31, 2009.  (SIGTARP has not given any indication that it intends to survey subsequent recipients of TARP funds.)  Although individual responses are not included in this report, SIGTARP indicates that it intends to post all responses, redacted as necessary, on its website within 30 days.

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Email This Content Email This Content Posted in TARP Capital. Tagged with , , . By Rob Klingler - Thursday, July 23, 2009

Commentary: NYTimes Recognizes Community Banks

The front cover of the May 17, 2009 issue of the New York Times Magazine asked “Are Small Banks the Future?“  As noted in the article, lending may have slowed at the largest banks, but at the other end of the financial system, there are 8,500 community banks, and most remain very strong.

In the midst of the worst banking crisis since the Great Depression, community banks have generally fared well. That’s because they typically shunned the lending practices that led to high default rates. They rarely participated in the securitization of loans, credit-default swaps and other overvalued financial products that put the global financial system in crisis. Instead, they stuck to the fundamentals. They considered the character and history of their borrowers. They required collateral. Without community banks, the current financial crisis would be a lot worse.

The focus of the mainstreet press, and the Treasury Department, continues to be on the largest institutions, whether it be the initial nine TARP Capital recipients, or the nineteen that underwent the stress test.  There is some rationality for this focus, the majority of assets, deposits and loans are held by these institutions.  But just like small businesses generally, community banks play a critical role in the American economy.

Community banks may have weathered the current crisis better than larger banks, but they remain an American oddity. Most other countries have 5 or 10 na­tional banks, and when they get in trouble, as they did in Iceland, it can be devastating. The balance in this country is tipped toward big institutions (the four largest control half the assets held by American banks and 40 percent of all deposits), but community banks still make 43 percent of all small business loans under $1 million. Since January 2008, fewer than 1 percent of all community banks have failed.

Email This Content Email This Content Posted in Commentary, Small Business, TARP Capital. Tagged with , , , . By Rob Klingler - Monday, May 18, 2009

SIGTARP Reports to Congress

On April 21, 2009, Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, released his quarterly report to Congress.

Survey Results

As we’ve previously discussed, Barofsky has issued letters to many TARP Capital Purchase Program recipients requesting information on how the institutions have used the TARP funds and how the institution was addressing the executive compensation limits.   As clarified in the report to Congress, SIGTARP sent letters to all recipients of TARP funds through January 30, 2009, a total of 364 recipients.  There is no indication that SIGTARP will be sending any letters to subsequent recipients.  SIGTARP received responses from all 364 recipients, a 100% response rate.  (It’s amazing how much more likely one is to respond to a survey when threatened with government action if one doesn’t respond.)

In testimony before the Senate Finance Committee on March 31, 2009, Barofsky had indicated that while his analysis was ongoing, he had concluded that one thing “was apparent from the responses – complaints that it was impracticable or impossible for banks to detail how they used TARP funds were unfounded.”  Barofsky does not repeat this conclusion in the report to Congress, but rather notes that the responses “provided a broad range of answers to the two sets of questions.”  While some banks identified detailed and specific uses of the funds, others provided more general responses.

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Email This Content Email This Content Posted in TARP Capital. Tagged with , , . By Rob Klingler - Wednesday, April 22, 2009

Monthly CPP Lending Reports

Treasury is requesting that all TARP Capital Purchase Program participants submit monthly data regarding lending activity.  This report is designed to supplement the monthly reports being filed by the largest CPP recipients as well as more detailed analysis to be completed based upon filed Call Reports.

The new CPP Lending Report calls for only three data points: (1) average consumer loans outstanding; (2) average commercial loans outstanding; and (3) total loans outstanding (which should be the sum of the first two data points).  Treasury recognizes that the internal reporting capabilities of each institution may vary, and permits institutions to briefly describe how they are reporting each matter.  The goal is to maintain the same methodology across time in order to maintain meaningful trend analysis, even if that methodology is different from others.

Reports are due within 30 days of the end of each month, with the first report (for February and March averages) due by April 30, 2009.  The Treasury will use the reports only for assessing the effectiveness of the Capital Purcase Program, but the data will be made available, on both an aggregate and institutional level, to the public.

Email This Content Email This Content Posted in TARP Capital. Tagged with , . By Rob Klingler - Thursday, April 2, 2009