Lending at Lite Speed
Think it’s tough to get a business loan? Imagine what a bank must go through to meet Dodd-Frank — onerous background checks on loan officers and applicants (including fingerprinting), stifling regulations, caps on fees, and exhaustive documentation.
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For the majority of commercial banks, the heart of their earnings, profits, and their very existence is the ability to make viable loans to firms and individuals.
When a bank extends credit to customers, it is risking depositor savings, stockholder investments, jobs, and the reputation of the lending institution. Lending officers and their support teams play a pivotal role in the expansion of the bank, the health of the business community, and the overall economy of the state and nation. If they want to be successful, it is critical that they evaluate the risk of all loan requests.
The importance of lending is made clear to new hires the day they start. They are told the bread-and-butter career path of greatest potential and distinction is the apprentice program of the so-called “credit” function.
Today, the local and national growth engine of commercial bank lending is sputtering. In the wake of the financial meltdown associated with the real estate collapse of 2007-2009, and the emergence of a plethora of Dodd-Frank style “fix-it” legislative initiatives, normal risk-taking in the commercial banking and regulatory community has virtually ceased operating. Without risk-taking, the commercial banking industry no longer has a reason to exist. And in the absence of evaluating and assuming studied risk, the dynamics for economic expansion and job creation have slowed to a crawl.
So how do the Dodd-Frank regulations, which became law in 2010, help or hinder commercial banks in their vital role as growth-enablers? The purpose of the statute, like so many other regulatory tomes already on the Federal Register, is to avert future massive bank failures or insolvencies.
To that end, a key feature of the legislation is its requirement that all banks attract and hold more capital on their balance sheets (chiefly stock investments in their banks from investors, along with greater retained earnings). By moving toward higher ratios of liquidity and capital as a percent of total bank loans and investments, Dodd-Frank oversight seeks to build a greater “buffer” to shield financial markets from the type of seizures and transaction failures that degenerated into the general panic and stultifying economic uncertainty that have gripped the nation over the last five years.
Among the benefits derived from higher capital-to-loan ratios is a greater comfort level for investors and lenders. After all, strengthening the “rainy-day” portion of a household’s balance sheet (e.g., greater savings, liquid cash, checking account balance, equity on one’s home) provides households with more flexibility and leverage to surmount nasty, unexpected financial events.
Another advantage to mandating higher proportions of liquidity and capital on bank balance sheets is the reinforcement of confidence in the U.S. dollar. Sounder capital ratios for banks, regardless of size, bolster the profile of U.S. financial and real estate markets as safe havens for international capital. That’s because most investment capital will go where it’s invited, and stay where it feels welcome and secure.
A closer look, however, suggests that several downsides to Dodd-Frank are causing pushback at community banks and within international institutions. Some mortgage bankers fear the act could potentially discourage lenders from extending credit. The worry is that Dodd-Frank provisions ban lenders from making residential mortgages unless they’ve made good-faith determinations — based on borrower-provided data — that borrowers can repay the loan. In normal times, that concern may seem overwrought. But reading the fine print of the act, some mortgage bankers worry that the provision is too subjective and leaves mortgage lenders open to lawsuits from borrowers in any foreclosure action.
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