Chronicle of Bankers’ Hours: Regulators determine how banks make loans


“What do you mean, you can’t extend my loan?” I’ve heard this question more than once, I’ve heard about it a lot more. And the perplexed, even shocked request does not come from a defaulting borrower. In this specific case, it may come from one of the bank’s best borrowers.

The honest answer is, “Because the regulators say so.” It’s nothing personal, just business, and the situation almost always affects commercial borrowers. My lending line in banking was real estate finance, so I would hear it from builders and developers. Banking regulatory agencies, the FDIC, the Comptroller of the Currency, and the Federal Reserve, are watching banks’ “credit concentration” very closely, especially home loans, because this class of lending assets can both rise and deteriorate rapidly in quality, as we have learned from the last two banking crises.

When bank examiners decide that your bank is overinvesting in construction loans, especially in a specific location, they ask you to reduce the total dollar amount of a certain type of loan and specify when this should be done. If management fails to comply, a “monitoring agreement” or even a “cease and desist” order may be issued, which is very bad news for a bank: your loans in other types of loans can be reduced and your growth limited. This last fiat is disastrous; banks are creatures that must grow or die, like when acquired for gold by a bigger bank.

We are currently hearing that there is a severe housing shortage and not much is being built. Certainly, but certain market segments are exceptionally robust. Ultra high-end residences, in premier resort communities around the world, for example; the 1% build and buy as fast as they can write million-dollar earnest money deposit checks (after all, 1% of the world’s population must be a very large number, right? ) Then there are luxury hotels that innovate from Rio to Singapore. So I guess there are banks active in some resort locations that are pushing the ceiling with significant financing for construction and development.

Banks have lending limits. A basic number is the “loan to a borrower”, which in its simple form, without the various nuances, is 15% of a bank’s capital (net worth). If our second fictional national bank in Downriver Montana has a net worth of $10 million and gets a $3 million super-duper loan opportunity, she can’t exceed $1,500,000. Or, maybe Second National did a lot of building loan business in the (also not real) Snowcloud Resort just 20 miles down the road. In both cases, our bank will have to participate in part of the loan. Certainly $1,500,000 in the first case, and perhaps much more in the second; maybe 90% of the whole transaction.

Shareholdings can be a lot of fun, especially if you’re the lead bank who has to do all the loan servicing work, and then herd it if it goes bad. The more participants you have to satisfy, the more fun you have. I remember a good ranch repartee saying I heard when I was a kid living in Porcupine Creek southwest of Rifle (real creek, real town) about boys working on the ranch:

“A boy is a boy. Two boys are half a boy. And three boys are not boys at all.

If your bank is the primary lender, the loan participants can be something like this: one is a partner, two is a nuisance, and no more than that… well, you’ve probably become a cat wrestler in time partiel.

What kind of loans do regulators prefer? Likely low risk, small loan amounts, with borrowers spread across a wide range of economic levels, so a downturn in one is offset by a recovery in another.

How about financing the refrigerator for everyone?

Pat Dalrymple is originally from western Colorado and has spent over 50 years in the mortgage and banking business in the Roaring Fork Valley. He will be happy to answer your questions or hear your comments. His email is [email protected].


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