Less paperwork, more bank loans: a change in federal rules is encouraging lending to small companies

Nation's Business, Sept, 1996 by J. Tol Broome, Jr.

A revision of federal regulations on bank loans is nudging banks to make more loans to small firms as it cuts paperwork requirements that were defeating the law's intent.

The revised regulations, which took effect Jan. 1, establish new enforcement guidelines for the Community Reinvestment Act (CRA), which Congress passed in 1977 to encourage banks and thrifts to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods." The CRA requires banks to show that they actively attempt to meet the credit needs of all members of their communities, including small companies.

Major violations of CRA rules can result in branch openings being stalled, merger attempts being blocked, and even the closing of offending institutions.

Over the years, the CRA regulations had become much more focused on documentation of efforts to make loans than on actual loan making., in effect, the thicker a bank's CRA files, the better its rating. As a result, President Clinton last fall directed the Federal Reserve Board-, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Office of Thrift Supervision to overhaul CRA regulations, shifting the emphasis from paperwork to performance.

Cal Cleveringa, vice president of American State Bank, in Sioux Center, Iowa, says the decrease in documentation requirements will surely increase small-business lending. "The new CRA guidelines will enable me to focus more on lending rather than on paperwork for CRA," says Cleveringa, whose bank has $163 million in assets. "It's certainly a move in the light direction."

Under the revised regulations, banks will now be rated according to their actual lending activity. The new rules also establish separate tests for small banks (those with assets under $250 million) and larger banks. Small banks will now be examined by the applicable banking agency under a straightforward five-area system with a heavy emphasis on lending to small companies. Larger banks will also be subject to a new test that emphasizes small-business lending.

The evaluation areas for small banks now are:

* Loan-to-deposit ratio. Banks score high for lending a high percentage of their deposits.

* Parentage of loans in the bank's market area. This is a measure of the bank's effectiveness in lending to those who have within its deposit area.

* Loans originated for community development and small-business purposes. Small-business loans are worth more points than they were under the previous system.

* Geographic and income-level diversity of loans made. Banks score points for lending to low and moderate-income customers.

* Response to written complaints by consumers. Points are awarded for prompt, efficient attention to customers, problems.

In CRA examinations conducted before this year, all banks were graded according to a 12-area documentation system that included extensive paperwork requirements. CRA examinations often took two weeks or longer-even for small banks. Examinations for large banks often took several months. Because of the shift from documentation to results, a CRA exam for a small bank now may require only a few day

Larger banks-those with more than $250 million in assets - now must demonstrate under a new three-part CRA test a diverse geographic distribution of small-business loans and lending practices that are innovative and flexible."

In addition, larger banks now must track and report small-business loans two different ways. The first is by the number and dollar amount of loans extended to businesses with annual revenues under $1 million. The second is b the number and dollar amount of all loans in three categories-those under $100,000 those from $100,000 to $250,000 and those of more than $250,000

In revising the rules, the regulators said their aim was to require larger banks to devote more resources to making small-business loans. Bank managers have taken notice.

"We are focusing on making a proactive effort to deliver products that will fit the small-business market and make money for the bank in the process," says Bill Holt, head of the Durham office for Wachovia Bank of North Carolina, which is one of the largest small-business lenders in the Southeast.

Not everyone in the banking business is happy with the revised CRA regulations. Sharon Humphreys, vice president of U.S. consumer CRA compliance with Citibank in New York City, says that although the paperwork system may have been simplified, the new reporting requirements are still onerous and costly." Humphreys acknowledges, though, that the CRA revisions wi place more of a spotlight on small business lending across the country.

"With the data-collection requirements, there will be more emphasis on comparisons with competitors in the examination process," says Humphreys. "This will cause many banks to increase their focus on small-business lending."