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Letters to Regulators
OCC Lending Limits Pilot Program
May 24, 2004
Office of the Comptroller of the Currency
Re: OCC Lending Limits Pilot Program: Docket Number 04-11
Dear Sir or Madam:
The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on the Office of the Comptroller of the Currency's proposal to extend for three years a pilot program that allows national banks with main offices located in states that have higher lending limits available for residential real estate loans or small business loans to apply and use the higher lending limits.
Currently, the OCC rules permit national banks to make loans in an amount up to 15% of its capital and surplus to a single borrower.2 National banks may extend that credit by another 10% of capital and surplus to the same borrower if the amount of the loan that exceeds 15% is secured by "readily marketable collateral." To enable community banks to remain competitive in states that provide their state-chartered institutions with higher lending limits, the OCC established a three-year pilot program effective September 10, 2001, that authorizes eligible national banks to apply for approval to make residential real estate loans and small business loans up to the state lending limits under certain conditions. Eligible national banks include those that are well capitalized and have a rating of 1 or 2 under the Uniform Financial Institutions Rating System (UFIRS), with at least a rating of 2 for asset quality and for management.
Under the pilot program, eligible national banks may make residential real estate loans in an additional amount up to the lesser of 10% of capital and surplus, or the percent of capital and surplus in excess of 15% that a state bank is permitted to lend under the state lending limit that is available for residential real estate loans or unsecured loans in the bank's home state. Similarly, an eligible national bank may make small business loans in an additional amount up to the lesser of 10% of capital and surplus or the percent of its capital and surplus in excess of 15% that a state bank is permitted to lend under the state lending limit that is available for small business loans or unsecured loans in the bank's home state. In each case, the bank may not lend more than $10 million to a single borrower under the new authority. Furthermore, there are individual and aggregate borrower caps. Under the individual borrower cap, the total outstanding amount of loans to one borrower cannot exceed 25% of the bank's capital and surplus. The aggregate cap provides that the total outstanding amount of any loan or parts of loans made by a bank to all of its borrowers under the special limits of the pilot program may not exceed 100% of the bank's capital and surplus.
A bank must apply and obtain the OCC's approval before it may use the special lending limits. The application includes a certification that the bank is well capitalized and has the requisite ratings, citation to state law on lending limits, a copy of a written resolution by a majority of the bank's board of directors approving the use of the new lending authority, and a description of how the board will exercise its continuing responsibility to oversee the use of this lending authority.
The current pilot program will end on June 11, 2004 (although national banks already in the program can continue to lend under the higher limits until September 10, 2004) and the OCC is now proposing to extend the pilot program for another three years, or until June 11, 2007. As of February 2004, 169 national banks headquartered in 23 states have received approval to participate in the program. The OCC compared the performance of 129 banks in the program to comparable state-chartered banks and concluded that there were no statistical differences between them. However, in the OCC's view, banks in the program have not had the additional lending authority for a sufficient period of time for the OCC to assess fully the effects of their participation in the program.
ICBA Members Report Favorable Experiences
Several of ICBA's members located in states such as California, Illinois and Nebraska report that their experiences under the pilot program have been very favorable. All of them stated that they are better able to serve their small business customers because of the increased lending limits. Furthermore, participating in the pilot program enabled them to maintain and expand relationships that would have moved to a larger bank had they not participated in the program. In short, the program helped to "level the playing field" between state and national banks.
All of our members who participated in the program also reported stable if not lower delinquency rates for loans during their period of participation. Bankers who use the program state that to be prudent they extend loans under the program only to their most creditworthy customers, i.e. their best customers. And similar to the OCC's observation, bankers point to the favorable comparison to state bank experience with higher lending limits as evidence that the higher limits permitted under the program are safe and sound.
ICBA Supports A Renewal of the Pilot Program
Although ICBA is disappointed that OCC is not proposing at this time to make the pilot program permanent, ICBA strongly supports the OCC's pilot program and supports its renewal for an additional three years. Community banks with national charters in states with higher lending limits for state chartered banks have a competitive disadvantage. Because of the national bank lending limits, they are often unable to meet customer needs. Although the possibility of using loan participations and syndications exists, some borrowers do not want to split lines of credit with more than one bank but instead want one bank to meet their entire credit needs. In other instances, borrowers are unwilling to wait while the bank sets up a participation. Arranging loan participations takes time and effort and forces the lead bank to share income with other banks participating in the loan.
As noted above, those ICBA members who have participated in the pilot program have found it to be very helpful. Increasing the lending limit for residential real estate and small business loans expands the ability for participating community banks to serve their customers, especially their largest and highest net worth (best) customers. The pilot program not only levels the playing field between participating national banks and state banks but also increases profits by letting banks keep the entire credit in-house. Furthermore, participating banks in the program appear to be lending only to the most creditworthy customers.
Agricultural Loans Should be Included
Since many community banks are agricultural lenders, ICBA strongly urges the expansion of the pilot program to include secured agricultural loans, particularly those secured by real estate. This is an area where increased lending limits would be especially beneficial for community banks located in rural markets that are dependent on agricultural lending and that face serious competition from state-chartered banks and the Farm Credit System.
Essentially, agricultural loans are a variation of small business loans. There is little reason to include small business loans but exclude agricultural loans, particularly secured loans. In many areas, a properly underwritten farm real estate loan is the most desirable and least risky loan in the bank. It seems incongruous to allow large residential real estate loans in excess of 15% of capital under the program (for example a $2 million loan by a $100 million bank with 10 percent capital), and not to allow similarly sized agricultural real estate loans.
Other Suggestions for Improving the Pilot Program
File a Notice Rather than an Application. Currently, a bank must apply and obtain OCC's approval before it may benefit from the special lending limits of the pilot program. The application includes a certification that the bank is well capitalized and has the requisite ratings, citation to state law on lending limits, a copy of a written resolution by a majority of the bank's board of directors approving the use of the new lending authority, and a description of how the board will exercise its continuing responsibility to oversee the use of this lending authority.
ICBA suggests that national banks be allowed to self-certify and file a notice rather than having to file an application. Once a national bank is qualified under the regulations to participate (e.g., the bank is well capitalized and has a CAMELS rating of 1 or 2 with at least a rating of 2 for asset quality and management), there seems little need for an application requiring further analysis and review by the OCC. Notification would be consistent with the way the Federal Reserve handles bank holding companies under Federal Reserve Regulation Y that are interested in engaging in additional financial activities.
Increase the $10 Million Cap on Loans Under the Program
The present regulations limit loans to a single borrower for real estate and small business loans to $10 million. ICBA urges the OCC to increase the $10 million individual cap to $20 million. A national bank with $1 billion in assets and 10% of capital and surplus already has the authority under the regulations to lend up to $15 million or 15% of its capital and surplus to a single borrower. Raising the $10 million cap would broaden the appeal of the pilot program to community banks and further level the playing field between state and national banks without raising any safety and soundness concerns.
Increase the Aggregate Cap on Loans Under the Program
Under the present regulations, the aggregate lending cap on all small business and real estate loans, to all of a bank's borrowers made in reliance upon the lending limits pilot program cannot exceed 100% of the bank's capital and surplus. ICBA urges the OCC to raise the aggregate cap to 200% of the bank's capital and surplus, particularly now that participating banks will have another three years to make loans under the program. The present aggregate lending cap is too restrictive (allowing only for a handful of loans) and burdensome for community banks and could be increased without creating any safety and soundness concerns.
Based on the favorable experiences of our members who have participated, ICBA strongly supports the OCC proposal to renew the lending limit pilot program for an additional three years. Furthermore, we support the expansion of the program to include agricultural loans and we support amending the program to raise the $10 million cap and the aggregate cap on loans. National banks that want to participate in the pilot program should also be able to file a notice in lieu of an application.
If you have questions or need any additional information, please do not hesitate to contact me at 202-659-8111 or at Chris.Cole@icba.org.
1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to protecting the interests of the community banking industry. ICBA aggregates the power of its members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace. For more information, visit ICBA's website at www.icba.org.
2 See 12 CFR Part 32 for the national bank lending limit.