Regulators ease up on small business loans

Regulators ease up on small business loans

Wednesday, March 03,2010 04:44 AM

It's a chicken-and-egg problem that's plagued the credit markets for a year: Small businesses become riskier lending bets in a downturn, prompting banks to slash their lending. But tight credit cuts off the financing companies need to hire and grow, which in turn drags on the economy and causes more businesses to fail.

Hoping to ease the small-business credit crunch, six regulatory agencies recently banded together in a joint statement essentially promising to back off second-guessing banks' loans. "Prudent" small business lending "will not be subject to supervisory criticism," a regulatory group led by the Federal Deposit Insurance Corp (FDIC) said earlier this month.
The move aims to reassure bankers who say they face blowback from government overseers when their loans go bad. Stiffer regulation has caused about half of community banks to pull back on their small business lending, according to a recent poll conducted in January by the Independent Community Bankers of America (ICBA).

"As the regulators tighten up their standards, the bankers tighten up their standards," said Mark Schroeder, president of community lender German American Bancorp in Jasper, Ind.

There's clear signs that's happening. The percentage of banks that tightened their credit standards for commercial loans to small companies hit a 20-year high in 2009, according to data from the Federal Reserve's quarterly loan-officer survey. Total small business lending dropped 1.8% for the year, removing $14 billion from the market, industry reports show.

"Everybody is walking the line," said Arthur Washington, senior vice president and chief lending officer of Nor-Cal FDC, a California financial development corporation. On the one hand, Washington policymakers urge banks to lend more -- but if loans go bad, regulators blast banks for their underwriting.

Schroeder is happy with new regulatory line-in-the-sand. "The regulatory body at least has recognized that, from the banks' perspective, the regulatory environment is probably too restrictive at this point," he said.

But others say they're waiting to see if local regulators will follow the orders to loosen up.

Read the rest at http://money.cnn.com/2010/02/25/smallbusiness/small_business_loans/index.htm