The key regulatory agencies in charge of financial institutions recently issued a statement urging lenders to engage in “prudent lending” to creditworthy small businesses. The statement came from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Conference of State Bank Supervisors.

The statement called on lenders to take a comprehensive review of the borrower’s financial condition and understand the long-term viability of the business and the borrowers' business plan rather than relying solely on so-called “general inputs” such as a borrower's geographic location or industry. Specifically, the statement urged banks to have a better understanding of the competition and local market conditions affecting the borrower’s business, and argued that lenders “should not base lending decisions solely on national market trends when local conditions may be more favorable.”

The statement also urged lending institutions to enhance their relationship with borrowers and enable loan officers to use sound judgment in the underwriting process rather than just a rigid calculation based on location and industry. Additionally, the statement calls on examiners to no longer “adversely classify loans solely due to a decline in the collateral value below the loan balance, provided the borrower has the willingness and ability to repay the loan according to reasonable terms.”

The overseeing regulatory bodies also recommended bank examiners ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small-business borrowers. According to the statement, regulators will not penalize lenders for loans made to businesses that happen to be in troubled locations or industries, provided the lenders appropriately and soundly evaluate that business owner’s ability to repay the loan.

After months upon months of calling for eased credit markets, NSBA applauds this new statement and urges banks to make every effort to work with America’s small businesses.