Why it matters

In recent remarks at the State Small Business Credit Initiative Conference, Comptroller of the Currency Thomas J. Curry discussed the state of small business credit programs, emphasizing the “crucial role that small businesses play in creating jobs and stimulating the health of our economy.” Comptroller Curry gave a shout out to community banks, which “play a very significant role” in providing small business credit. Smaller community banks with less than $1 billion in assets made one-third of outstanding bank loans to small businesses, he said, citing figures from the Independent Community Bankers Association, and midsize community banks with less than $10 billion in assets made another 18 percent of outstanding bank loans to small businesses.

The Comptroller addressed pending changes to the federal bank agencies’ guidance under the Community Reinvestment Act (CRA) proposed last September, including the addition of loans to or investments in Community Development Financial Institutions (CDFIs) that finance small businesses or small firms as activities presumed to support economic development. The agencies have suggested that when assessing certain small business loans and investments, more detail and additional examples of activities that “promote economic development” should be provided in the guidance. “It is our goal that, once finalized, this CRA guidance will encourage banks to engage in more economic development activities that strengthen small businesses,” Curry told attendees.

Unfortunately, the generally broad support by the banking agencies for community banks’ CRA compliance has not deterred some community activist groups from demanding increased donations and public disclosure of future competitive plans for CRA compliance as quid pro quo for receiving their nonobjection to even modest community bank mergers.

Detailed discussion

Comptroller of the Currency Thomas J. Curry recently celebrated the importance of small businesses to the U.S. economy and provided his perspective on small business lending. Working collaboratively with the Department of the Treasury, the Office of the Comptroller of the Currency (OCC) is working to broaden banks’ awareness of State Small Business Credit Initiative (SSBCI), he told attendees of the annual conference. As part of those efforts, the OCC has developed a publication for banks to identify various opportunities for small business lending and released a Frequently Asked Questions document together with the Federal Deposit Insurance Corporation (FDIC).

Enacted as part of the Small Business Jobs Act, the program encourages banks to make loans to small businesses. “The SSBCI program has been particularly effective because it focuses on results,” Curry said. “SSBCI has supported over 12,000 transactions and for every $1 in federal funding, $7.40 has been generated in private lending or investment.”

Despite these statements, Curry recognized that banks are concerned about how regulators will view loans made under such programs that might not otherwise meet the bank’s standard underwriting guidelines. “The OCC has emphasized in our guidance that as long as a bank’s actions reflected a prudent, comprehensive review of a borrower’s financial condition, generally, the bank would not be subject to supervisory criticism for participating in an SSBCI program,” he explained. The agency “also expects banks to ensure that their participation in the SSBCI or other federal small business programs is consistent with, and supports, their institution’s overall strategic goals and objectives.”

To encourage participation in the SSBCI program, the OCC intends to step up its outreach and training, Curry said. In addition to having examiners speak to their banks about small business lending opportunities, the agency proposed some tweaks to its guidance under the Community Reinvestment Act (CRA).

The CRA, enacted in 1977, encourages banks to meet the credit needs of all community members, including residents of low- and moderate-income neighborhoods. Financial institutions periodically receive ratings from federal regulators on their CRA compliance, which “is important both as a matter of public reputation and for a variety of business reasons,” Curry said. The banks’ ratings, which the agencies are required by the CRA to consider in approvals of bank merger applications, include donations, investments and service tests as well as how a bank is meeting the lending needs of its communities. While the banking agencies must remain neutral in processing merger application protests by community groups, they have rarely found that the protest groups have identified CRA compliance shortcomings that should prohibit a proposed merger. Instead, acquirer banks generally enter into enhanced cooperation agreements with the protesting community groups which sometimes include increased commitments of funds to remedy assertions made by the community groups in public correspondence. The experience of Banc of California covered in the banking press in 2014 is an example of such encounters.

Bankers have expressed to the OCC that the existing CRA guidance was deterring some types of economic development activity, in particular providing financing to Community Development Financial Institutions (CDFIs) and other financial intermediaries that assist start-up businesses. Last September, the OCC and other federal agencies proposed changes to the CRA guidance that the regulators hope will spur greater funding for CDFIs and small businesses. Curry told attendees the proposed changes would add more detail and additional examples of activities that “promote economic development,” and add loans to or investments in CDFIs that finance small businesses or small farms to the list of activities that are presumed to support economic development. “It is our goal that, once finalized, this CRA guidance will encourage banks to engage in more economic development activities that strengthen small businesses,” Curry said.

The Comptroller also highlighted the Service Test for providing small businesses with technical assistance on financial matters as another route for banks to receive CRA consideration. A bank may not be able to approve a loan for a small business applicant, Curry said. But the bank can still receive CRA consideration for providing technical assistance directly to a small business owner or for providing financial support to a partner that will help the small business owner improve business operations to become more bankable.

“Instead of simply saying ‘No,’ a bank can help a small business owner improve the chances of getting to ‘Yes,’ ” Curry said. After receiving technical assistance, the small business owner can then be referred back to the bank, a financial intermediary (such as a CDFI), or another bank participating in SSBCI programs, he added.

The Comptroller also reminded his audience that banks can receive CRA consideration under the Service Test for providing small businesses with technical assistance on financial matters.

To read Comptroller Curry’s prepared remarks, click here.

The 2014 supplemental guidance proposed by the federal banking agencies is linked here.