On Friday, the federal institutions regulatory agencies and the state supervisors (collectively, the “regulators”) issued a joint statement, entitled Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers, restating their supervisory views on prudent lending to creditworthy small businesses. The statement is intended to reassure lenders that prudent small business lending, after a comprehensive review of the borrower’s financial condition, will not be criticized by supervisory actions. In addition, regulators will not adversely classify loans solely due to a decline in collateral value below the outstanding principal balance.

For small business lending to be considered “prudent,” lenders generally should understand the long-term viability of the borrower’s business and business plan and consider, if relevant, the borrower’s personal credit and strength of any personal guarantees. Lenders should not, however, refuse to extend credit to sound borrowers because of the borrower’s industry or geographic location.

According to the statement, a comprehensive review of the borrower’s financial condition should include the following considerations:

  • An understanding of the long-term viability of the borrower’s business;
  • An analysis of the strength of the borrower’s business plan, including the borrower’s plan for the use and repayment of the borrowed funds;
  • An evaluation of the future cash flows of the borrower’s business and a sensitivity analysis based on assumptions that are neither overly optimistic nor overly pessimistic;
  • An application of judgment to assess the borrower’s personal creditworthiness, if relevant, including the borrower’s personal financial strength, credit score and other judgmental factors; and
  • The strength of any collateral; however, excessive reliance should not be placed on cyclical factors such as appreciating or depreciating collateral.