The federal banking agencies and state bank regulators -- through the Conference of State Bank Supervisors -- have issued new guidance on prudent lending to creditworthy small business borrowers. Among other things, the Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers released on February 5 indicates that examiners generally will not adversely classify a loan solely due to a decline in the collateral value below the loan balance, provided that the loan file documents the borrower’s willingness and ability to repay the loan under reasonable terms. The Statement expresses concern that supervisory policies and actions may inadvertently curtail the availability of credit to sound small business borrowers and that some depository institutions might refuse credit to sound borrowers because of a borrower’s particular industry or geographic location. According to the Statement, depository institutions will not be subject to regulatory criticism for small business loans made on the basis of a comprehensive review of a borrower’s financial condition. The guidance advises depository institutions to understand the long-term viability of a borrower’s business, focus on the strength of its business plan, and have an understanding of the competition and local market conditions affecting the borrower’s business.
Nutter Notes: The Statement indicates that effective monitoring and managing of credit concentrations may include the use of modeling tools to identify and manage concentration risk and that such models may rely on general data, such as geographic location and industry. However, the guidance warns that national market trends and general factors like geographic location and industry should not be used as a substitute for the evaluation of an individual borrower’s repayment capacity. The Statement also provides some insight about what depository institutions can expect from examiners. Cash flow analyses should cover current and expected cash flows reflecting expectations for the performance of the small business over a reasonable range of possible future conditions, rather than exceedingly optimistic or pessimistic projections. To the extent that a small business owner uses his or her personal wealth and resources to support a credit application, the guidance suggests that loan files should demonstrate the owner’s credit history and financial strength, including credit score. The guidance suggests that loan files should document an analysis of any secondary sources of repayment, such as the strength of any guarantor or collateral support, and the ability of the small business owner to provide additional capital. Finally, the guidance indicates that loans will not be classified by examiners solely on the basis of a borrower’s association with a particular industry or geographic area that is experiencing financial difficulties.