So Obama is going to free up the loans to small businesses?

The Banking System Doesn’t Need More Money

As a small business owner with a lot of friends who also own small businesses, I get tired of hearing all the news stories about how small business lending is going to get a shot in the arm from President Obama’s programs or any other source in the foreseeable future. Yesterday I listened to a speaker from one of the large banks talk about how many loans the bank was making, doing its share to get the country moving again. Forget the big banks; they were never the backbone of small business lending. But something is clearly amiss with the community banks, banks with less than $1 billion (and sometimes as little as $75 million) in assets. These banks are simply not making business loans unless they are absolutely gold-plated. Period. This isn’t because they don’t want to make loans; it’s because they’re being criticized by examiners, and basically their hands have been slapped so hard that they aren’t willing to take any risks. I have a great credit score and great relationships with banks; I’m not one of those customers who has a “slight” credit issue. I have zero derogatory entries, meaning no delinquencies or legal filings. I’ve had the same home for 10 years; stable employment (I work for myself, and I’ve had the same employer for two decades); I have founded, run and sold several companies. In other words, I’ve been darn successful but didn’t go to college, so I consider myself mainstream America material. Also, at age 56, I saw the RTC meltdown of the 80’s and 20% prime, so I’ve got a few scars.

I can speak personally on this issue, having talked to various lenders I have robust relationships with. God forbid I would need to borrow money on, for instance, real estate that is debt-free, or with a substantial amount of equity. If it’s worth $1 million, and you want to borrow $100,000 on it, or take any money out, you are out of luck. I’m talking about recently built income-producing properties, stabilized with good occupancy, solid tenants and a great appraised value. The regulators have made it clear to banks that they will be criticized for any loan where the borrower takes out any cash, regardless of the underlying fundamentals. This is nonsensical. And don’t try using the property for collateral on a business loan.

I understand that real estate is depressed, and that values are uncertain, and that tenants are moving, and all the other fundamentals. And I understand that speculative property or non-income-producing property is an issue. And I understand that it’s a problem when the borrower has uncertain cash flows or other material issues affecting the future ability to repay. My bankers will tell you that I understand the requirements and underwriting issues as well as they do, which is unusual. I’m not sure how anyone who has less knowledge would even stand a chance. The regulators are encouraging banks to re-amortize real estate loans where occupancy has fallen and the rents won’t cover payment requirements, rather than foreclose. Lower payments allow the borrower to “hold on” until things recover. That makes perfect sense, and after such a re-amortization the debt service coverage (the ability to pay the note from income) is acceptable, even good. But then the regulators want the bank to put up more capital for that loan. Banks aren’t going to do that. They just call in the note, foreclose, and/or tell the borrower to bring more cash or move the loan to another bank. Really? Where is that “other” bank?

Recently a commercial broker told me he hadn’t closed a deal in four months because the sellers weren’t willing to discount enough, and the buyers weren’t willing to pay enough, and in most cases it didn’t matter because there was no lending available. It doesn’t matter how cheaply you can buy an asset if there is no lending source, because most of the buyer pool evaporates.

The answer is simple: The regulators need to relax—not on every loan, but use some common sense! There’s no reason the system has to have a stick in the spokes and STOP. We’ve had underwriting standards for years; make them stricter, everyone agrees the money flowed too freely for the past few years. Freeing up capital by allowing solid borrowers to use sound cash flows and good collateral to get loans will help them grow or sustain their businesses, and will also allow them to buy depressed assets from others, which will lift the values of those assets that currently have literally no market.

What would be wrong with a loan made where the loan to value doesn’t exceed 50%, with a debt service ratio of at least 150%, from a solid borrower with stable quality global cash flows, and good credit score/history? Why wouldn’t the regulators encourage that loan, to money back on the street?

I am doing ok, not unaffected, but not slaughtered either. I feel for all the small businesses in America that are crippled. They don’t understand why their debt free building isn’t worth anything for collateral on a loan, or why their receivables which have deteriorated only slightly are now not worth anything as collateral. They are being asked to payoff the loan against those receivables, which effectively shuts their business down, They weren’t told that due to the uncertainties and degradation of the aging, that their value is now only 50% of face value, rather than the former 70%. They are being told they are worth zero. That’s nonsensical, and frankly, sad.

Here’s the simple truth from one of the “little guys” in a small business who sees the misery here in the street, and just can’t relate to our government’s plan to put more money in the system. There is plenty of money out there; someone just needs to stop sitting on it, after the regulators tell them it’s ok to lend some with solid underwriting policies.

21 Comments

  1. Why do you think the regulatory policies are the way they are? It seems like regulators should want community banks to make loans to small businesses when the risks are minimal.

  2. Very well said. its interesting, that when the gov’t told the banks to lend money to people that could not afford what they are buying, ie 5 % down on a home, its was ok. Then when we had the financial crisis, the same Gov’t came down on banks for lending money to people who could not afford the loan, ie people that put 5% down on a home.
    The truth is, banks should lend money to credit worthy customers. And yes your assets have some value.

    bottom line. never borrow more than you can pay. A solid loan is a solid loan.
    The gov’t needs to stay out of the private sector. let the free markets work.

  3. problem w examiners is their folks are seeing how much the FDIC is having to absorb in losses with so many bank closings and they don’t want to be the examiners of record for any failed banks.

    banks that didn’t do crazy things are having to subsidize the FDIC and the guilty banks at a price

    further, until the bank closures subside, the examiners will not ease up – and there are MORE closures coming.
    perhaps the government should shore up the FDIC directly with the stimulus slush?

  4. In the late 80’s my bank was taken over four times. Once it happened so fast my banker called to say when you get your new checks, hold them the banks name has changed again. The final takeover was by NCNB, and if those four letters don’t give you chill bumps, well I remember a billboard on I-35 that read, “Texans against NCNB call 1-800…” Recessions run in 10 to 20 year cycles and it seems we would have alarms that sound, to avoid this again. Our banking system is run by humans, some are greedy, and some aren’t good managers,just like in business. The only problem is they hold the keys to the middle class, which fuels the consumer fire. This is a passing thing, but, this administration is making problems that will make this look minascule. The President we get in 2yrs. 329 days better be an ace pilot with their seatbelt on tight.

  5. as a commercial real estate owner I ditto the frustration with the way banks are treating their long term borrowers who still have solid finacial footing

  6. Good paper….I agree.
    I heard the other day that not one person in the Obama admin. comes from the private sector and they’re telling us how to write a P&L statement…..go figure!

  7. The big government types believe their intervention is all that will help. In the words of Thomas Paine, “Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one.

  8. See where Congress passed a two billion dollar bill to relieve bankers’ mistakes. You can always count on us helping those who have lost part of their fortune, but our whole history records nary a case where the loan was for the man who had absolutely nothing. Our theory is to help only those who can get along, even if they don’t get a loan.

    -Will Rogers, January 22, 1932

    Seems the only thing that changes is the number of billions.

  9. Having my Mother run a Federal Credit Union, I have had experience with examiners. They are just like mathmaticians and can only see black and white. There are no variables, only rigid facts. They are not foresighted people who want to see the good or best interests, they are in the business of finding only the negative. It’s a mentality that should be changed to allow capitalism to flourish again.

  10. Ron,

    Good article. Another interesting point is that the banks are currently borrowing from the Fed at historically low rates and can make great returns by putting the money in short-term investments rather than lending the money. As a result, they don’t have much incentive to make loans right now.

Comments are closed.