A Second Look for Small Business Loan Applicants

Posted by: John Tozzi on December 16, 2009

One of the notions to come out of President Obama’s meeting with bank execs Monday was that lenders would take a “second look” at rejected loan applications. From the AP:

President Barack Obama challenged top bankers Monday to explore “every responsible way” to increase lending, saying they were obliged to help after being rescued by taxpayers. He asked them to “take a third and fourth look” at their small-business lending.

US Bancorp CEO Richard Davis told the group meeting at the White House that his bank would be willing to take a second look at every loan it rejects. And he said he would present the idea to other members of the Financial Services Roundtable — a group representing the largest financial companies, according to the Roundtable. Davis is its incoming chairman.

I called US Bank to find out how such a “second look” process will work. It turns out that the lender has long been doing an automatic “second look” on rejected loans, according to bank spokesman Steve Dale. “If for some reason they don’t meet our criteria, for years now we’ve been running them back through,” he says. The bank looks for some way to adjust the deal — by lowering the amount or changing conditions, for example, to make it fit the criteria, Dale says.

It’s not entirely clear what US Bank will be doing differently since CEO Davis’s statement at the White House. Dale says the bank will look for ways to make potential borrowers qualify with SBA loan guarantees or other credit enhancements. “We’re going to try harder to say yes and we’re going to look for more ways to say yes,” he says.

US Bank gets about 40,000 applications for small business credit each month (including equipment leasing, credit cards, etc.). For basic commercial loans, the bank’s approval rate is between 40% and 50%, Dale says. The number of applicants has dropped by 20% since last year. US Bank’s own commercial loan portfolio (not synonymous with small business lending) has declined from nearly $90 billion a year ago to $85 billion now, according to Bloomberg data.

Davis, the incoming chairman of the banker’s trade group Financial Services Roundtable, said he would promote the “second look” approach to other executives there. Other financial execs pledged to boost lending after meeting with Obama, including Bank of America, which said it will increase small business lending by $5 billion next year. The bank has originated about $12 billion, including credit card lending, to small businesses in the first three quarters of 2009.

Whether because of slackening demand, higher credit standards, or both, lending to small businesses is still dropping. The 22 biggest TARP recipients have decreased total lending to small business by $11.6 billion since April, when the Treasury began collecting information on small business lending. US Bank, which repaid the $6.6 billion in TARP funds it received, has expanded its small business portfolio in that period.

Reader Comments

Anonymous Banker

December 16, 2009 10:53 PM

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

http://anonymousbanker.com/?p=579
(excerpt)
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:

You will be asked to STATE your “household income”. Tell them whatever you want. They won’t even ask for a tax return.
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.
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!
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.


Janie Johns

December 19, 2009 12:01 AM

40billion.com is a good option for business owners seeking financing and resources. Small businesses and startup entrepreneurs raise money through personal connections online (a.k.a person to person, peer to peer, social lending). This elevates access to funding, increases transparency, reduces costs, and lowers risk.
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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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