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Regulators to ease criticism of small biz loans

WASHINGTON (2/8/10)--The National Credit Union Administration (NCUA) on Friday joined federal and state banks and thrift regulators in a message meant to emphasize "that financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition will not be subject to supervisory criticism for small business loans made on that basis."

In a joint statement, the regulators said that they "recognize that small businesses play an important role in the economy and know that some are experiencing difficulty in obtaining or renewing credit," and, in response, are "working with the industry and supervisory staff to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers."

The statement added that "financial institutions should understand the long-term viability of the borrower's business and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry."

In the guidance, the regulators also recommended that financial institutions focus on the borrower's "plan for the use and repayment of borrowed funds," and maintain "an understanding of the competition and local market conditions affecting the borrower's business" rather than simply basing their lending decisions "solely on national market trends when local conditions may be more favorable."

The regulators also told financial institutions that their examiners "will not discourage prudent small business lending by financial institutions," will not "criticize institutions for working in a prudent and constructive manner with small business borrowers," and, for the most part, "will not adversely classify loans solely due to a decline in the collateral value below the loan balance."

While the examiners will "not classify loans due solely to the borrower's association with a particular industry or geographic location that is experiencing financial difficulties," they will "expect institutions to employ sound underwriting and risk management practices, maintain adequate loan loss reserves and capital, and take appropriate charge-offs when warranted."

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