Posts Tagged ‘Securitization’

Anonymous Banker : Bank of America and Chase commit to increase lending to Small Business through unsafe and unsound, deceptive and unfair credit card practices

Wednesday, December 16th, 2009

As you all know, I’ve been an ongoing supporter of the need for banks to step up to the plate and lend to Small Business.   Credit availability to the small business sector is a necessary component to our nation’s economic recovery. 

The History of the Small Business Credit Line

But I am also a banker, and as such, recognize the need for safety and soundness in lending.  I blasted the industry over the last decade when they foolishly disregarded prudent lending practices, leaving the door open for  business “liar loans”.  During that time, a business owner could obtain a small business revolving credit line for up to $100,000 by completing a one page application.  They didn’t have to provide any verification of personal income or business revenue.  They didn’t have to substantiate a profit or the ability to repay the debt.  The loan commitment was based almost entirely on the credit score of the individual owner/guarantor.  In that era, if you had a pulse and a credit score of 700, you could go into any big bank and get a loan for up to $100,000.   Well, okay, there was  one other criteria:  the loan amount was typically limited to 25% of the businesses STATED revenue.  Everyone knew that if you STATED that you had $400,000 in business revenue, you could qualify for a $100,000 business credit line.

Additionally, the banking industry abandoned all forms of public filings on these credit applications.  What does that mean?  Well, first, because the loan was “to the business entity”, the line of credit did not appear on the individual owner/guarantor’s  personal credit report.  The bank also didn’t file a UCC filing on the business assets – the cheapest and easiest way to let other lenders know that one bank already has a loan out to a potential  business borrower.  So the line of credit became invisible to other potential lenders.

The result of these imprudent lending practices was that the business owner could go from bank to bank and accumulate credit lines.  Banks had no way of knowing if that Small Business was applying for their first line of credit or their third, fourth or fifth  line of credit.

These Small Business loans were rarely, if ever,  sold through the securitization process.  That meant that the entire credit risk was held on the books of the bank.  When the economy began to crash and burn, so did the “liar loan” portfolios.  Inside the industry, bankers scrambled   to understand exactly how much exposure they had in this market. 

Throwing the baby out with the bathwater:  Banks withdraw from the Small Business Lending Market

In response to the economic crisis, the very first thing banks did was limit business revolving credit lines to Small Businesses to 15% of gross revenue.  And thankfully, banks finally began to apply some level of credit underwriting to loan requests up to $100,000, requiring borrowers to submit tax returns to support the information they provided on the application. 

At the same time, banks assumed that every loan they had on their books was a “liar loan”.  So they systematically cancelled these credit lines to small businesses across our nation,  stripping the businesses of working capital for salaries, inventory, rent and receivables.  These businesses received no prior notice.  The banks simply froze the credit line and sent the customer a letter, after the fact.  

The banks did make one small concession to their small business borrower.  They allowed them to apply to have their lines reinstated.   These requests for reinstatement were subject to the “new” credit criteria.  So in a year of often declining revenues, the banks applied their new guideline, limiting the borrowing to 15% of gross revenue.  Many viable businesses no longer qualified under the stricter criteria and still found themselves without a line of credit. 

At present, viable businesses have lost their access to working capital and  banks simply don’t want to grant business working capital lines and retain the risk.

Did bankers learn their lesson?  I think not!

You’d  think that the banks would have learned a lesson on the importance of income verification from this.  Unfortunately, they have not.  The banks are promising a new round of lending to Small Business, and they will meet this obligation through  Small Business Credit Cards. 

Want a credit card with a line up to $50,000?   Check out Bank of America or Chase Bank.  Here’s how their process works:

  1. You will be asked to STATE your  “household income”.  Tell them whatever you want.  They won’t even ask for a tax return.
  2. Business Revenue:  Banks don’t ask and they don’t care.  If they do ask, they won’t verify it.  So feel free to lie.
  3. Credit reporting?  Sure, the bank will pull your credit report to get your credit score.  But then, just like the old days, the line will disappear from the radar screen.  At Chase Bank, it appears that management encourages their business bankers to sell their Small Business Credit cards by advising the business owner of the benefits afforded to them when their new credit card is  NOT  reported on their personal credit report.  The invisible business loan all over again. Shame on them!
  4. If you have a good credit score and a personal card from Bank of America, give them a call.  Perhaps they will offer you the same deal they offered me. When I called customer service,  The BofA representative offered to convert my personal credit card to a business credit card because I was such a valued customer!  When I assured her that I didn’t own a business, she insisted that I didn’t need one to get a business credit card.  Perhaps our regulators would like to monitor the prevalence of this practice throughout the industry and prohibit the banks from circumventing the spirit and intent of the Credit Card Act.

The Question is….  WHY are banks doing this?   Greed!  (Of course)

Why would banks continue to lend without regard to any of the time-honored traditions of safety and soundness.  First, unlike  Revolving Small Business Credit lines,  banks DO sell-off  credit card exposure through securitization.   The bankers, together with Wall Street, devised a way to reap the profits  while, at the same time, absolving themselves of any losses.  Securitization rules, in their current form, empower and even encourage banks to violate all prudent lending practices.

Despite warnings released in the OCC’s Survey of Credit Underwriting Practices 2009, stating:

A key lesson learned from the financial market disruption is the need for bankers to apply sound, consistent underwriting standards regardless of whether a loan is originated with the intent to hold or sell. The OCC reminds bankers that underwriting standards should not be compromised by competitive pressures or the assumption that the loan will be sold to third parties.

banks continue to apply lower credit standards to forms of credit they will sell off in the market than they do to credit they will retain on their books.  Just compare the banks requirements for a $50,000 Business Credit Card to a $50,000 small business revolving line of credit.  The first fails to verify ANY financial information and is sold.  The second verifies financial information and the risk is held by the bank. 

Business Credit Cards are a profitable and huge market for big-banks.  Here are a few statistics from Creditcard.com:

  • In 2008, JPMorgan Chase was the largest issuer of small business credit cards with $34.5 billion in total card volume. Bank of America is second with $26.31 billion and Capital One is third with $20.7 billion. (Source: Nilson Report)
  • Credit cards are now the most common source of financing for America’s small-business owners. (Source: National Small Business Association survey, 2008)
  • 44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months —- more than any other source of financing, including business earnings. In 1993, only 16 percent of small-businesses owners identified credit cards as a source of funding they had used in the preceding 12 months. (Source: National Small Business Association survey, 2008)

Congress Empowers Bankers to be greedy and deceptive to Small Business

Our Congressional leaders failed to include Small Business Credit Cards in the new protective laws provided under the Credit Card Act of 2009.   Do our government leaders actually believe that it is okay for banks to practice deceptive and unfair lending against Small Businesses, but not consumers? 

Many of the provisions of this Act do not go into effect until 2010 (giving the banks plenty of time to jack up everyone’s credit card rates to almost 30%).   Buyer Beware!  Small Business owners need to know that Small Business Credit cards are not protected from deceptive and unfair credit card banking practices, such as:

  • Interest Rate Hikes – any time for any reason
  • Universal Default
  • How banks apply your payments - Lowest Interest Balances Paid First
  • Limits on over-limit fees

I suspect, that absent a change in regulation, the following disclosure from Chase Bank’s new INK  Small Business Credit Card will remain the same long after the provisions of the Credit Card Act go into effect. Perhaps the disclosure should be called “Chase Bank’s transparent disclosure of deceptive and unfair credit card practices, rather than:

Pricing and Terms –Rate, Fee and other Cost Information

  1. You authorize us to allocate your payments and credits in a way that is most favorable to or convenient for us. For example, you authorize us to apply your payments and credits to balances with lower APRs (such as promotional APRs) before balances with higher APRs.
  2. Claims and disputes are subject to arbitration.
  3. As described in the Business Card Agreement, we reserve the right to change the terms of your account (including the APRs) at any time, for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account.  (emphasis in original)

Conclusion:

Our government leaders and our regulators failed to protect this country from unsafe and unsound lending practices, which brought our economy to the brink of collapse.  As they develop their new-found focus on Small Business lending,  they need to ensure that credit, in every form, adheres to the principles of safety and soundness and of honesty and integrity throughout our financial system.  These principles must be adhered to by BOTH the borrowers and the banks.  And sadly, perhaps neither can be trusted to simply “do the right thing”.

Yes, we certainly do need to make loans to the small business community.  I feel their pain.  But, America, as a world leader,  needs to set an example and do it right and do it NOW.  The securitization market isn’t going to magically improve because our tax dollars temporarily guarantee the risk to investors (TALF).  And without a strong securitization market, credit in this country will remain frozen.  Lending will only improve when we implement strict and meaningful regulations that govern the safety and soundness in our lending system for all forms of credit.  The ultimate investors in these loans must feel secure in the likelihood that these loans will be repaid.  It’s an issue of confidence.  Banks and Wall Street have a long way to go in winning back the trust of the public.  I don’t think they can get there on their own.  I think we need to bring them there  (and they’ll be kicking and screaming all the way). 

For your reading pleasure:

National Small Business Administration Survey 2008

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Anonymous Banker: TALF’s Legacy CMBS program is an abuse of our taxdollars

Saturday, November 7th, 2009

You know that feeling you get when you eat ice cream and it gives you that pain in the side of your head?  Try making sense out of the government program:  TALF – Legacy CMBS and you’ll get the same pain: brain-freeze.

I understand the need to jump-start the securitization markets.  That process is vital to ensuring that banks meet their fundamental obligation to support the credit needs of individuals and businesses, which in turn is vital to our economic recovery. 

However, the Legacy CMBS program has absolutely nothing to do with helping market participants meet the credit needs of households and small business.  I’ve looked at this program from several different angles.  I’ve spoken to folks “in the know” about the processes and procedures in the CMBS market.  I’ve learned a lot and I admit, I still don’t understand it all.  But of one thing I’m certain:  it ain’t helping to get the banks to lend to the small business community.

My question, and the basis for this writing, is to figure out how the Legacy CMBS program meets the fundamental goal of TALF.  It begs to be asked, and answered,  in light of the fact that there have been ZERO newly issued CMBS processed through the TALF, while there have been over $6 Billion in Legacy CMBS processed.   

Let’s start with the easy stuff:  The initial premise of WHY the TALF program was created in the words of the Federal Reserve

The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF), to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans.

The premise makes sense.  Years ago, banks held loans on their books. They retained the credit risk and therefore were diligent in applying safe and sound lending practices to all the forms of credit described above.    As the need for more credit expanded through our society, the banking industry’s lending functions were limited by the amount of capital they carried.  The securitization process was born.  Banks made the loans, bundled them together and sold them off to Wall Street.  They got their money back (and a nice profit to boot) and began the process anew.  Credit flowed. 

Wall Street, in turn,  purchased these pools of loans (commercial mortgages, residential mortgages, credit cards, auto loans, SBA loans, student loans, etc),  divided them up into segments called tranches that had different ratings:  investment grade and non-investment grade.  Each of these tranches were converted into what the layperson might know as a bond issue, which is really the same as an “asset backed security”.  The bonds were then sold in large and small pieces to lots of different investors:  some individuals, mutual funds, banks, pension plans and other institutional investors. Through this step,  the funds returned back into the hands of the Wall Street firm,  who, in turn,  purchased more loans from the banks.  Credit flowed.

The tranches or classes, defined by CUSIP numbers,  are paid to the bond-holders in a particular order.  The highest rated classes are paid first, both from the monthly loan payments that the “original borrower” makes and from those loans that are perhaps refinanced and paid off in full.  Those tranches at the bottom of the list have the highest risk, since they are the last to be paid out.

Okay, I’ve over-simplified, but hopefully you’ve gotten the gist of things without the brain-freeze.

As the demand for new loans increased, banks started to make loans without any consideration to the rules governing safety and soundness in lending.     We all know where that led us:  right here in the middle of our nation’s economic collapse. 

As our economy deteriorates,  loan default rates by the original borrowers increases.    That, in turn, lowers the value of the bonds.  First problem:  many of these bonds are held in the capital accounts of banks, insurance companies and investment firms.  When the bond values decline, so does the financial industry’s capital.  The second problem is that as the bond market’s performance deteriorates, there are less investors willing to buy the bonds and the market dries up.  Basically, no one wants to buy this crap.  If there isn’t a buyer, then you can’t sell.  Bond prices plummet some more, and therefore financial industry’s core capital  plummets. 

Additionally, if no one will buy the bonds,  Wall Street stops buying the loans from the banks, and the banks stop making the loans.  Financing becomes virtually impossible to find and the credit market is frozen.

TALF… to the rescue.  We need to get the securitization market flowing.  Through the TALF program the government virtually guarantees payment to the bond holders.  Under TALF, Wall Street, conceptually,  will start to buy new loans and put out new bond issues through securitization.  The banks know they have a market in which to sell the loans they make, and so they begin to lend again.  If  only that was actually happening!!!   If there were newly issued CMBS being processed through TALF, then I’d see some hope in the success of this TALF scheme.   But alas, it’s not to be.

What value, then,  does the TALF Legacy CMBS program have in fostering lending activity?  Legacy CMBS’s represent  loans that were ALREADY made, ALREADY sold to Wall Street, ALREADY packaged up and divvied up and sold to individuals and institutional investors.  When the FRBNY takes a piece of an OLD securitization as collateral and makes a loan, using those bonds as collateral, NO NEW MONEY goes to the banks.  The bank already got that money  years ago.  No new money means no new lending.  The Legacy CMBS TALF program is one big act of smoke and mirrors. 

The CMBS TALF program is supposed to spur the lending functions of banks when the FRBNY finances the purchasing of NEW commercial loans.    Consider this fact:  To date  TALF financing  has not been used to purchase any NEW commercial mortgages.  Conversely, it has been used to purchase over  $6 Billion in Legacy CMBS

How, then, has Legacy CMBS TALF  helped promote lending?  Simply put…. It hasn’t!!!!  Which firms are utilizing the Legacy CMBS TALF program?  Sorry, says the FRBNY:  TALF rules say we don’t have to share that information with the public.  So much for the new age of transparency.   What, then, is the purpose of the Legacy CMBS program?  I have my own theory, which I’ll share with you here. 

For those of you who are willing to risk a little brain freeze, here is a great site to visit:  http://www.cmbs.com/securitization.aspx?dealsecuritizationid=292

It’s a perfect picture of one of these securitizations.  The loans were originated mostly by Bank of America and then to some extent by Barclays and Bear Sterns.    The securitization’s name is BACM 2005-3.  You’ll see here the list of all the properties that were financed, the interest rate charged, the maturity date of the loan, the type of property and where it’s located.  It’s an interesting conglomeration of loans which include $250 Million in financing to the Woolworth Building, $74+ million in financing to the Queens Atrium,  various hotels, Walgreens and CVS stores and  sundry other  multifamily, industrial, retail and office properties across the United States.

I thought it was fascinating to look at.  I came upon this report when I searched the TALF site for CUSIP numbers that were approved for collateral in a Legacy CMBS transaction:  namely CUSIP number 05947UR42.  I’m not singling this issue out for any reason.  They just happened to win my web-surfing lottery.

Here’s what I learned.  A Wall Street firm (perhaps a bank or their investment firm counterpart) will go out buy a bulk of bonds, that carry the same CUSIP number, from the market.  They need to put together a minimum of $10 Million in one bond issue to borrow against them from the FRBNY. 

In step one, the Wall Street firm comes up with funds to buy the bonds in the secondary bond market….. not a terribly difficult task for them.  Then, they take them to the FRBNY, pledge them as collateral, borrow money from the FRBNY and in doing so they get …… most of their money back (minus the haircut).  Now, if , or maybe more accurately when, that  bond portfolio, backed by commercial real estate,  fails to perform, the investment firm or bank counterparty simply turns their bonds over to the FRBNY in full payment of their loan.  Any future losses on those bonds from that portfolio will be funded by the taxpayers.  

What does the investment firm or bank counterparty do with the cash they received from the loan they got from the FRBNY.  They go out and buy MORE previously issued bonds.  Then they take those bonds, bring them to the FRBNY, pledge them as collateral, and once again, get most of their money back.  Each time they do this, they pass the risk of that Commercial Mortgage Backed Security (less the haircut) on to the taxpayer. 

Furthermore, they are now holding an investment which they can value on their books without having to mark-the-value to market, thanks to the TALF program and our taxpayer guarantee.  They have limited their losses and any depreciation in value of their bond holdings.

The Legacy TALF program only benefits the Wall Street firm that has the resources and means to buy up the bonds and bring them to the FRBNY’s window for a loan.  It isn’t helping the smaller community banks that are sinking under the pressure of ever higher default rates on commercial mortgages they hold.  And it isn’t getting the big banks to start lending again.  If the government wants to argue that shoring up the  capital positions of these few firms taking advantage of the Legacy CMBS TARP program is helping to stabilize these  financial firms, I’d buy that argument.  But then, they shouldn’t be promoting the program under TALF whose primary mission is :   to help market participants meet the credit needs of households and small businesses through new securitizations.

Legacy CMBS TALF is not doing THAT!!!   Churning previously issued commercial real estate bonds for a few savvy Wall Street financial companies does not promote lending to consumers and small business.  It provides absolutely no incentive to promote new lending functions  and it isn’t.  A better acronym might be:  SUC OFF which stands for “Shoring Up Capital by Overextending Federal Funding”.

By the end of the TALF program, which the government estimates will finance up to $2 Trillion dollars of Asset Backed Securities, these firms will have accumulated tens of billions of dollars in bonds guaranteed by our tax dollars which they will simply hold in their capital portfolios.   I’ve been called cynical.  Well so be it.  Until I see the CMBS program under TALF used to finance NEW commercial loans, I will continue to call it like I see it:  A government bailout in sheep’s clothing and an inappropriate use of our tax dollars.

Related Articles:

Looming Crisis:  CMBS Defaults Pit Banks Against Each Other in Senior, Junio Fights (Nov. 8, 2009)

Fed to Add Older CMBS to TALF Lending Program in July (Update3) – May 19, 2009 

Fed Announces Expansion of TALF to Legacy CMBS – May 26, 2009

TALF:  Introduction of Commercial Mortgage-Backed Securities (CMBS)  – June 16, 2009

 

 

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Anonymous Banker: Please join me and Congressman Alan Grayson in Taking on the Fed

Tuesday, October 13th, 2009

I know I’ve been harping on  the TALF program which  is divesting banks of toxic credit card and autoloans.  TALF was supposed to get credit flowing  by breathing life into the securitization market for bank loans. Our country’s economic system became dependent on the securitization process to manage the flow of credit.  Securitization translates into banks initiating  loans, then packaging them together and selling them off through a product called Asset Backed Securities (ABS). 

The ABS’s are purchased by investors such as insurance companies, mutual funds and pension plans.  Ultimately, we, as individuals are the purchasers through these other investors.

If you were going to buy a pool of assets, and in this case I focus on credit card and auto loans, what level of due diligence would you expect the bank to perform in evaluating these loans?  Most banks today have a pre-programmed “scoring” system.  It puts significant weight on the credit score of the borrower. In large part, this scoring process is governed by Regulation B, the Equal  Credit Opportunity Act.

During the years of sub-prime mortgage lending, what the banking industry did was grant loans on what was called “stated income”.  The borrower simply “told” the bank what they earned and the bank simply took their word for it.  Today, we are calling these loans “liar loans”.  The banks failed to apply even the most basic of credit underwriting processes to these loans:  income verification.   Banks simply stopped caring because they knew they would be divesting themselves of these loans when they sold them to Fanny Mae and Freddie Mac.  We all know how that turned out.

You’d think we would have learned our lesson.  But we have NOT!!

Go into a bank today and apply for a credit card or go into a car dealership and apply for an auto loan.  All you need is a credit score over 680 and you are likely to be approved.  You will be asked for your basic information:  Name, address, social security number, phone number, date of birth, etc. 

Then you will be asked to “state your household income” and if it’s a business credit card you will be asked to “state your annual revenue”.   The bank does not verify this information.  They ask for no tax returns, they ask for no pay stubs.  They ask for NOTHING!! 

In the August 18, 2009 Term Asset-Backed Securities Loan Facility: Frequently Asked Questions, it states:

What types of non-mortgage receivables are TALF eligible?

Auto-related receivables will include retail loans and leases relating to cars….

Eligible credit card receivables will include both consumer and corporate credit…

How are subprime versus prime defined for auto loan, auto lease, and credit card ABS?

Auto loan and lease ABS are considered prime if the weighted average FICO score of the receivables is 680 or greater. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus.

Credit card ABS are considered prime if at least 70 percent or more of the receivables have a FICO score greater than 660. FICO scores must reflect performance data within the last 120 days. For credit card trusts where the percentage of receivables with a FICO score of greater than 660 is not disclosed, the subprime haircut schedule will apply.

Consider this:  Small Business working capital lines of credit issued by banks cannot be sold through TALF.   And early on in this financial crisis, the banking industry systematically cancelled credit lines across the nation to the small business community.  No warning.  They simply mailed the customer a letter stating that their credit line had been cancelled.  These decisions were not based on any repayment history and point-in-fact, many of these borrowers never missed a payment.  The banks decision was based primarily on the credit score they pulled.  If the score was less than 720, the line was cut.   This was the banks way of divesting itself of risk on these lines.

These lines, over at least the last five years, were granted to businesses without the banks verifying any financial information on the companies or the owners that personally guarantee these loans.  Lines of $5000 to $100,000 were the most affected.  The banks wrote to the customers and said they could reapply, if and only if they submitted current financial information to the bank.  The reconsiderations were done on a case by case basis.  Today, all new credit applications to small businesses require tax returns, both personal and business, for proof of revenue and proof of income.  Thank goodness!

Over the last year, over $21 Billion dollars in credit cards and over $10 Billion dollars in auto loans have been sold by the banks through the TALF program.  And these loans were ALL granted without any form of income verification.  Yet the amounts are the same  ($5000 to $50,000) as those of the working capital lines which are held to a much different credit underwriting standard.

Our bank regulators, all of them, have put in place regulations regarding safety and soundness in lending.   The foundation of these regulations come from  the Federal Deposit Insurance Corporation Act of 1931.   Included in these regulations are guidelines on lending which speaks to loan documentation and credit underwriting.  The regulations state:

C.  Loan documentation. An institution should establish and maintain loan documentation practices that:

1.  Enable the institution to make an informed lending decision and to assess risk, as necessary, on an ongoing basis;

2.  Identify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner;

D.  Credit underwriting. An institution should establish and maintain prudent credit underwriting practices that:

1.  Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made;

2.  Consider the nature of the markets in which loans will be made;

3.  Provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed;

Here is  the thorn that pricks me each and every day as I witness the banks granting credit cards and auto loans to so many borrowers that have no hope of ever repaying this debt and to those that continue to incorrectly state their level of income.  This  interagency regulation governing safety and soundness does NOT state that the banks don’t have to apply the basic rules in lending  if they are going to sell off the loans through TALF and stick the taxpayer with the risk.   Yet, in the face of this regulation, which is supposed to be enforced by our bank regulatory agencies:  FDIC, OTS, OCC, and FRB, there comes along a program, TALF, which ENCOURAGES the banks to violate the most basic directive for safety and soundness:  income verification.

And the banks flaunt this behavior in their Regulating Agency’s  face.  With one hand, banks pull back credit to the small business community, because these loans must  continue to be carried on the banks books.   Banks are  now (thank goodness!) requiring tax returns for all business loans.  They generally refuse to lend to a business whose owners have a  credit score of under 720.  Some banks even set different underwriting criteria for “customers” and for “non-customers”.  Chase Bank, for example defines a business customer as one who banks with them for more than six months and maintains average deposit balances in excess of $5000.  Their approval rate for non-customer loans is a mere fraction of those for customer loans.  (I have to wonder if this special evaluation criteria would be supported by CRA which is designed to ensure that banks lend in the communities in which they do business and not just to the customers with whom they do business….. but that is for a different article).

On the other hand, compare the underwriting standards used by these same banks for credit card loans to businesses and consumers and consumer auto loans.  The amounts of the loans are, again, in the same range:  $5000 to $50,000.  Yet the banks refuse to apply ANY safety and soundness standards in underwriting these credits simply because …. they are going to absolve themselves of the risk when they sell them off through TALF.  Additionally, they are granting these loans to borrowers that have credit scores as low as 660 and 680, again, because they are going to divest themselves of the risk through TALF and those scores make the loans eligible for the TALF program.

What can you do about this? 

The New York Fed has  established a 24-hour telephone and internet-based hotline for reporting of fraudulent conduct or activity associated with the TALF.  The hotline can be reached at 1-866-976-TALF (8253) or www.TALFhotline.com.

I seriously have no personal vested interest in correcting this situation.  In fact, I probably risk losing my job each time I write one of these articles.  But I feel quite strongly about TALF’s  risks to us, as taxpayers, and to the future of our country’s economic recovery.  We cannot recover if we continue to allow the banks to make the same mistakes over and over.   

As citizens of the United States, we enjoy a democracy that provides us with a level of freedom not experienced elsewhere in the world. Written into the framework of our constitution is the idea that if we, as a people, demand a change, it must be made. The change may not be the will of Congress, but if the people call for a change in a law that they feel is unfair and detrimental to the health of our nation’s economic foundation, then it is incumbent upon our Congress to listen and to act.

I hope after reading this article you will take a moment to send your email to the TALF hotline, protesting both the use of our taxdollars to divest the banks of these new toxic credit cards and auto loans and demanding that our Regulators force the banks to apply reasonable verification of income for all forms of credit, not just the loans the banks will hold on their books.   I will also provide links on my website that will guide you through the process of writing to your Congressional leaders.  You may feel free to use this Anonymous Banking article to express your concerns.

When you write to the TALF police, please also ask them why, in this new age of so-called transparency, the TALF rules do not require the disclosure of the names of the banks that are selling these assets, how much each bank is selling and what form of credit they are selling.  I asked them.  They emailed me back and said TALF rules don’t require them to share this info.  Transparency?????

Let’s be heard on this issue. If you don’t do it for yourself, then please consider doing it for the security of our future generations.

Please share this article with your friends, family and business associates.

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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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