when it comes to future small business loans, things appear to be getting worse instead of better ...
http://online.wsj.com/article/SB1000...951766826.html
(snip)"The regulatory environment makes it very difficult to do what we do," says Mr. Depping, who last summer saw his bank hit with an enforcement order from the Federal Deposit Insurance Corp.
A spokesman for the FDIC declined to comment on Main Street, a unit of closely held MS Financial Inc. Dan Frasier, director of corporate activities for the Texas Department of Banking, confirmed that Main Street is "working on the process of moving out of the state banking system," but declined to provide details.
Bankers have long complained about their overseers, but it is rare for a bank to basically close its doors aside from an acquisition or failure. Mr. Depping blames the move on a tightening regulatory noose.
Regulators came under fire in the financial crisis for lax oversight that allowed financial institutions to dole out too much credit to unworthy borrowers. Some bank executives now complain that federal and state agencies have swung to the other extreme, poring over minute details of virtually every loan, including those to small businesses.
"The No. 1 complaint that we hear from community bankers is that they feel that regulators have gone one step too far and are choking off lending," says Paul Merski, chief economist at the Independent Community Bankers of America, a trade group that represents small banks.
Regulators defend their efforts, saying that intensive oversight is needed to prevent banks from taking too much risk and repeating the behavior that got the industry in trouble.
Mr. Depping has been on a collision course with regulators since 2009, when FDIC examiners began questioning the bank's large concentration of small-business loans. Nearly all of Main Street's $175 million loan portfolio has gone to customers like dentists, owners of fast-food franchises and delivery-truck drivers, who use the loans to purchase equipment. The bank's average loan size is $100,000 to customers who have less than $1 million in annual revenue, Mr. Depping says.
Mr. Depping says that Main Street's focus on small-business lending has sheltered the bank from much of the devastation that has swept the industry, including 385 bank failures since the start of 2008.
Main Street had profits of $1 million in the second quarter and wrote off 1.25% of its loans as uncollectible. That is below the industry's charge-off rate of 1.82% in the FDIC's data for the first quarter, the latest available. The bank has earned nearly $11 million in the past year.
In July 2010, the FDIC slapped Main Street with a 25-page order to boost its capital, strengthen its controls and bring in a new top executive. Regulators also said the bank was putting too many eggs in one basket. Mr. Depping says regulators wanted the bank to shrink its small-business lending to about 25% of the total loan portfolio, down from about 90%.
Mr. Depping says he explained to regulators that Main Street has focused on small-business lending since he bought the bank in 2004 with a group of investors. He says the bank makes credit decisions based on a combination of the borrower's personal-credit and business-credit histories, among other factors.
"We felt that servicing small business is something the country needs and that we're really good at it. I thought the model was working just fine," Mr. Depping says.
Main Street also was required to increase its capital cushion and prohibited from substantially expanding its balance sheet.
FDIC officials told the bank to file financial reports that "accurately reflect the financial condition of the Bank as of the reporting date," particularly regarding the money it set aside to cover loan losses.
The FDIC also ordered Main Street to shore up its lending guidelines so that loans are "supported by current credit information and collateral documentation, including lien searches and the perfection of security interests; have a defined and stated purpose; and have a predetermined and realistic repayment source and schedule," according to the order.(snip)
Reading between the lines, it would appear that the FDIC's new requirements limit the acceptable percentage of small business loans versus personal loans, auto loans, mortgages and other types of loans, for reasons of 'risk diversification'. Unfortunately, as fewer and fewer Americans can qualify for new mortgages, new auto loans, new personal loans etc. this trickles down and pressures a reduction in the amount of new small business loans that a bank may approve.
Also reading between the lines, it would appear that the FDIC's new requirements for small business loans will involve both a 'perfected security interest' i.e. substantial borrower collateral with which the bank can secure its exposure in writing new small business loans, and a 'predetermined and realistic repayment source' i.e. an already working and proven business model.
Stated another way, future business loan applicants who lack significant collateral ( i.e. equity / investments ) that can be pledged against the small business loan, and who are seeking to start up a new business that is NOT a franchise with a proven business model, will have much more to worry about than obtaining a 780+ credit rating !!!
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