Posts Tagged ‘Economic Recovery Act’

Anonymous Banker Asks: “Did our country’s leading banks lose their SBA lending rights”

Saturday, May 16th, 2009

In light of the devastatingly poor SBA lending results and the fact that the SBA has been dragging their feet in implementing the new lending programs dictated by the Economic Recovery Act, I started reading deep into the bowels of the SBA website and the Code of Federal Regulations that govern the criteria banks must meet in order to have SBA lending and SBA securitization status.

And after doing so, one has to wonder if ANY of our leading banks are qualified, under clearly defined government regulations,  to partipate in the SBA lending programs.

The SBA Website and  the Code on Federal Regulation  states that the banks have to meet these criteria:

1.  Operate in a safe and sound condition using commercially reasonable lending policies, procedures, and standards employed by prudent Lenders. 

That rule alone takes most of our banks off the SBA lending list.  They all violated the regulations on safety and soundness and in so doing created this nation’s economic crisis .

2.   Have continuing good character and reputation, and otherwise meet and maintain the ethical requirements of §120.140

Dictionary.com defines reputation as  the estimation in which a person or thing is held, especially by the community or the public generally.  How many of our nation’s leading banks would be considered by our general population to have a good reputation?   I can’t think of any, can you?

3.  Holding sufficient permanent capital to support SBA lending activities (for SBA Lenders with a Federal Financial Institution Regulator, meeting capital requirements for an adequately capitalized financial institution is considered sufficient permanent capital to support SBA lending activities)

Based on the recent stress test results and our governments demands that the following banks raise additional capital:  Bank of America, Wells Fargo, Citigroup, Regions, SunTrust, Fifth Third, PNC and KeyCorp; can one imagine that these banks have met the requirements to be adequately capitalized?  If they were, then why would we be demanding that they raise additional capital?  Does that mean that somehow, behind the scenes, these banks have been told that they don’t qualify as SBA lenders?  Is it any wonder that our Small Business Community can’t find any SBA lenders among the biggest banks that took our taxdollars in the bailout? 

Based on this information and what I see each day as a banker to the Small Business Community, it is my general opinion that our government leaders are completely and intentionally fooling us into believing that there is any support intended for the Small Business Community.  It simply is not so!

 

SBA Securitization Market

If my suspicions are correct, then I think it is incumbent upon the Small Business Administration to direct the small business owner accordingly and come clean with the general public.

The Code of Federal Regulations CFR 120.4 also defines the conditions that need to be met for a bank to securitize their SBA loans.  And this is where it gets really interesting.  Our leaders expound on the need to get the securitization markets flowing in order to stimulate lending and the future of our economic recovery.  This mission is the foundation on which the TALF program was built and at the core of the American Recovery and Reinvestment Act of 2009.  Yet, based on the criteria defined in CFR 120.4, it is unlikely that any of our lead banks will be able to securitize SBA loans.  If SBA loans cannot be securitized, then that would mean that the banks would have to hold them on their books, and we all know that isn’t going to happen.

Here are a few of the guidelines, but I recommend that you all read the code in its entirety:

1.  Securitization —A “securitization” is the pooling and sale of the unguaranteed portion of SBA guaranteed loans to a trust, special purpose vehicle, or other mechanism, and the issuance of securities backed by those loans to investors in either a private placement or public offering.

2.  A Lender may only securitize 7(a) loans that will be fully disbursed within 90 days of the securitization’s closing date.  If  the amount of a fully disbursed loan increases after a securitization settles, the Lender must retain the increased amount.

This part pretty much kills any chance of a small business obtaining an SBA working capital line under the 7(a) program. 

3.  Have satisfactory SBA performance, as determined by SBA in its discretion. The Lender’s Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, on-site review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission);

Which part of the SBA’s Guiding Principles  is our banking industy supporting as they systematically withdraw credit from small business, systematically increase business credit card rates to upwards of 25% and have generally refused to support the small business owner through any meaningful lending programs?

According to IRS.gov, in 2006 (the most updated numbers they had)  there were 22 million sole proprietor tax returns filed in 2006 and an additional 3.2 million S-corp returns filed for businesses with revenue under $1 million dollars.  These companies generated over 1.2 trillion dollars in revenue and paid salaries of over $200 Billion dollars and rent (supporting our nations commercial property owners) of over $70 Billion dollars.

If the Big Banks are not going to support this group through meaningful lending programs, then perhaps it is time for Ms. Mills and the SBA to focus on providing  the incentives and support required for the community banks to increase their lending initiatives to the local markets they serve so well.

Our regulators have failed us in the past and I’d like to know if  the SBA is  enforcing the regulations that are in place that dictate exactly what banks are allowed to participate in SBA lending and securitizations.  I think that in light of the new transparency rules supported by President Obama, we have a right to know if the lead banks are simply refusing to participate in SBA lending or if they have been justifiably banned from participating for non-compliance of our goverment regulations. 
 
If my suspicions are correct, then I think it is incumbent upon your office to direct the small business owner accordingly and come clean with the general public.
 

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Regulators – Our nation’s ball-less wonders!

Wednesday, January 28th, 2009

Our regulators were armed with the laws to prevent this financial crisis.  They simply refused to act.    If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.Anonymous Banker weighs in on banks violation of law:  Regulation H

 

Recently there has been a lot of talk about the belief that there hasn’t been enough regulation to keep the banks in line.  I, personally, have been blaming Congress for not having enacted laws that would arm the banking regulators with the means to control and monitor the activities of the nation’s banks and the power to impose penalties or take punitive measures when the banks stray from their legally defined mission.  I assumed that the problems that led to our current economic crisis arose from issues that were not addressed – or inadequately addressed – in our laws and regulations.  

 

Bank regulators are our first line of defense:  Office of Comptroller of the Currency, Treasury, Board of Governers of the Federal Reserve System, FDIC, Office of Thrift Supervision. After Congress passes a law they leave it to the regulators to put the law into effect by writing  and adopting regulations.  Our regulators have one, and only one real purpose – to ensure that each and every bank operates in a safe and sound manner.  In order to accomplish this, they send out  teams of examiners – routinely, to every single bank in the country – to delve into the bank’s activities and check them against the requirements of regulations.  This whole procedure, the laws, the regulations and the agencies to examine compliance with the regulations – was put in place to protect the depositors’ money, the banks that hold that money and –  on a national scale, our country’s economic safety and soundness.  This process began 75 years ago, after the banking industry collapsed and led us into the Great Depression.       

 

Well, today I read Federal Reserve Regulation H —   Subpart E entitled “Real Estate Lending and Appraisal”, a regulation born from the Federal Deposit Insurance Corporation Improvement Act of 1991.  My eyes were opened!!!  My premise, that Congress failed to pass laws to protect us, was completely wrong!  This regulation, which has been in place for over ten years – sets forth all the appropriate guidelines and limitations that should have held the banks in check.

 

 

 

Now this question begs to be asked:  Who is making sure that our banks are complying with the regulations that already exist?  And when they are not in compliance, what actions are taken against them to bring them into line?

 

What I believe after reading this is that NO ONE is watching as the banks run amok in their quest for profits.  Really…. no one.  Did the controlling authorities  perhaps forget that this regulation existed since they authored it over ten years ago?   Or did they foolishly believe that the greedy bankers would, of their own accord,  grow a conscience and behave in a responsible manner? 

 

Federal Reserve Regulation H is a “uniform” regulation.  This means that each of the other three agencies also adopted an identical regulation at the same time.    They are found in 12 CFR 208.51;  12 CFR 34.62, 12 CFR 365 and 12 CFR 560.101.   Links to each of these are provided at the end of this article.  This is some of the content of Reg H and it is directed at all banks.

 

The Real Estate Lending Standards section requires banks to  “adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interest in real estate.  Policies should be consistent with safe and sound banking practices; appropriate to the size of the institution and the nature and scope of its operations; and reviewed and approved by the bank’s board of directors at least annually.”

 

It instructs banks to  monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions.

 

And it requires that the adopted policies reflect consideration of the Interagency Guidelines for Real Estate Lending Policies established by the federal bank and thrift supervisory agencies.”

 

The Interagency Guidelines, which are part and parcel of the regulation,  are extensive and I’ve provided links below to the full text document.   But the following quotes will make my point.

 

“Each institution’s policies must be comprehensive, and consistent with safe and sound lending practices, and must ensure that the institution operates within limits and according to standards that are reviewed and approved at least annually by the board of directors. Real estate lending is an integral part of many institutions’ business plans and, when undertaken in a prudent manner, will not be subject to examiner criticism.”

 

“The institution should monitor conditions in the real estate markets in its lending area so that it can react quickly to changes in market conditions that are relevant to its lending decisions.”

 

“Prudently underwritten real estate loans should reflect all relevant credit factors, including—

  • the capacity of the borrower, or income from the underlying property, to adequately service the debt;
  • the value of the mortgaged property;
  • the overall creditworthiness of the borrower;
  • the level of equity invested in the property;
  • any secondary sources of repayment;
  • any additional collateral or credit enhancements (such as guarantees, mortgage insurance, or take-out commitments).”

 

Our regulators were armed with this law and these guidelines.  And yet, when they examined the banks and discovered that they were not applying a credit review process that was  consistent with safe and sound lending practices, in spirit or in fact, they failed to impose penalties that would have brought these horrific lending standards  to an abrupt end.   They had to have known that the  banks  were issuing no-asset and no-income-verification loans, delving into subprime lending markets, selling these toxic loans into the market  and subsequently repurchasing them to hold in their capital accounts.

 

Instead of taking decisive action,  they  merely issued another interagency comment to the banks (see links below for full text), urging them to cease and desist in their unrelenting participation in the subprime lending market. 

 

What should our regulators have done and what did they have the power to do?  Our regulators could have called for the firing of CEO’s of the banks and replaced the Board of Directors.  They also have the power to ban executives that are found to have violated banking regulations from ever working in the banking industry again.  Our regulators could have refused to continue their FDIC insurance for failure to comply.  They can also limit dividends paid to shareholders. If they would have made an example of even one bank by exercising their power, it would have influenced the entire industry and perhaps prevented the crisis we are in today.

 

It is interesting that one of the strongest banks in the nation, JP Morgan Chase,  states quite clearly in their 2007 Annual Report exactly how pervasive the problems were.  And we know already that the other banks behaved equally irresponsibly and equally in violation of the law and Reg H.  Some of these banks no longer exist and others will soon disappear.  After reading the following comments, can one imagine that the regulators were unaware of the banks’ violations these many past years?  Or do you have to conclude, as I have, that it was our regulators, and not Congress, that failed completely in safeguarding our county?  The law was there.  The regulators simply did not exercise their powers to enforce them.

 

JP Morgan Chase 2007 Annual Report  (released approximately one year ago)

… increasingly poor underwriting standards (e.g., loan-to-value ratios up to 100%, lax verification of income and inflated appraisals) added fuel to the speculation and froth in the markets. Many of these poor mortgage products were also repackaged and dispersed widely through various securities, thus distributing the problems more broadly.

 

…we still believe that subprime mortgages are a good product. We will continue to find a prudent way to be in this business. 

 

We should have acted sooner and more substantially to reduce the LTV rates at which we lent, given the increased risk of falling prices in a market of highly inflated housing values.  We also should have tightened all other standards (e.g., income verification) in response to growing speculation in the market and the increasing propensity of people to respond to aggressive lending standards by buying houses they could barely afford.

 

In the face of these comments and the banking industries apparent violation of Reg H, instead of being penalized,  banks were rewarded through the TARP program.   Our regulators  have done nothing to ensure that the banks meet their fundamental obligation to lend money.  They have merely asked them to do so.  And finally, our regulators are still not forcing the banks to apply income verification processes to all forms of credit including auto loans and credit cards. 

 

Somehow I don’t think the punishment has fit the crime.    And now that I have the understanding I so desperately sought, I really wish I didn’t look so hard.  I find myself even more saddened to know that while  our country  had the structure and laws in place to prevent this economic collapse, the regulators failed to protect us and the guilty continue to be rewarded for bringing this country to its knees.

 

Sources:   12 CFR 34.62         12 CFR 208.51      12 CFR 365  

Interagency Guidance on non-traditional mortgages

Interagency Guidace on Nontraditional Mortgage Product Risks

    
	     

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