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Federal R eserve Bank

D. M c T E E R , J R .




March 24, 1993

DALLAS, TEXAS 7 5 2 2 2

Notice 93-37


The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
Interagency Policy Statement
on Credit A v a i la b il it y

The Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve System,
and the Office of Thrift Supervision have announced a program directed at
dealing with problems of credit availability, especially for small- and
medium-sized businesses.
The program will focus on the five areas in which the agencies will
take action designed to alleviate the apparent reluctance by banks and thrifts
to lend. Those areas are:

Lending to Small- and Medium-Sized Businesses


Real Estate Lending and Appraisals


Appeals of Examination Decisions and Complaint Handling


Examination Processes and Procedures


Paperwork and Regulatory Burden.

The agencies intend to complete virtually all of the changes
proposed in the program within the next few months. As the specifics of any
change are finalized, that change will be made and published while details of
other changes are in the process of being finalized.

A complete statement about the actions the agencies have planned is
attached. The statement reaffirms the agencies’ belief that it is in the
interest of lenders, borrowers, and the general public that creditworthy
borrowers have access to credit.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (





For more information, please contact Basil Asaro at (214) 922-6066.
For additional copies of this B a n k ’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely yours,

Office of the Comptroller of the Currency
Federal Deposit Insurance Corporation
Federal Reserve Board
Office of Thrift Supervision

Interagency Policy Statement on
Credit Availability
March 10, 1993

Problems with the availability of credit over the last few years have been especially
significant for small- and medium-sized businesses and farms. This reluctance to lend
may be attributed to many factors, including general trends in the economy; a desire by
both borrowing and lending institutions to improve their balance sheets; the adoption of
more rigorous underwriting standards after the losses associated with some laxities in the
1980s; the relative attractiveness of other types of investments; the impact of higher
capital requirements, supervisory policies, and examination practices; and the increase in
regulation mandated by recent legislation —specifically, the Financial Institutions Reform
Recovery and Enforcement Act (FIRREA) and the Federal Deposit Insurance Corporation
Improvement Act (FDICIA).
The four federal regulators of banks and thrifts — the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the
Federal Reserve System, and the Office of Thrift Supervision — recognize that in the last
several years the buildup of certain regulations and practices has become overly
burdensome. Indeed, those regulations and practices may have, in some cases, stifled
lending, particularly to small- and medium-sized businesses that met prudent underwriting
It is in the interest of lenders, borrowers, and the general public that creditworthy loans
be made. Since economic growth, especially job growth, is fueled primarily by smalland medium-sized businesses, credit availability to those borrowers is especially
important. Accordingly, the agencies are working on the details of a new program to help
ensure that regulatory policies and practices do not needlessly stand in the way of lending.
Loans to creditworthy borrowers should be made whenever possible, as long as they are
fully consistent with safe and sound banking practices.




The new program is one aspect of an overall effort by the agencies to evaluate carefully
and react appropriately to risk in the United States financial services industry. That
overall effort envisions substantial oversight, in some cases more than we have now, in
areas that pose greater risk to the system. By the same token, regulatory burden will be
reduced where risk is low, especially for strong, well-managed banks and thrifts. This
program is also part of a broader effort to ensure equal credit opportunity for all
Americans and to make credit and other financial services available to low- and moderateincome neighborhoods and disadvantaged rural areas.
The Program
The new program involves a variety of regulatory and other administrative changes which
have been agreed to in principle by the agencies. These changes fall into five categories,
each of which is discussed below.
Timing. The agencies will work to complete virtually all of the changes outlined below
within the next three months. Once the specifics of any of the changes are agreed upon,
that change will be made and published, while distribution of other changes remains to
be made.

Eliminating Impediments to Loans to Small- and Medium-Sized Businesses

Reducing Documentation. Strong and well-managed banks and thrifts will be permitted
to make and carry a basket of loans with minimal documentation requirements, consistent
with applicable law. To ensure that these loans are made to small- and medium-sized
businesses, there will be a ceiling on the size of such loans and limits on the aggregate
of such loans a bank may make.
Encouraging Use of Judgment\Borrower’s Reputation. The agencies will issue
guidance to make it clear that banks and thrifts are encouraged to make loans to smalland medium-sized businesses, particularly loans in the basket discussed above, and to use
their judgment in broadly assessing the creditworthy nature of the borrower — general
reputation and good character as well as financial condition may be elements in making
these judgments. Reliance on a broad range of factors when making a credit
determination is especially important.
Other Assets Especially Mentioned. Improper use of the category of Other Assets
Especially Mentioned (OAEM) may inhibit lending to small- and medium-sized
businesses. Accordingly, the agencies will clarify that examination and rating procedures
do not group OAEM loans with classified loans.





Reducing Appraisal Burden and Improving the Climate for Real Estate

The experience of the last decade has underscored the importance of sound underwriting
standards and effective supervision for commercial real estate loans. Nonetheless, in
certain instances regulatory burdens may be adversely affecting loans to sound borrowers.
This may be particularly so in the case of loans secured by real estate that are primarily
used for non-real estate business purposes. Real estate collateral is often pledged for
loans to small- and medium-sized companies that have few other tangible assets.
Using Real Estate Appraisals Prudently. In some cases currently required real estate
appraisals may not add to the safety and soundness of the credit decision. Indeed, in
some cases, appraisals may prove so expensive that they make a sound small- or medium­
sized business loan uneconomical. Accordingly, the agencies will make changes to their
rules relating to real estate appraisals along the following lines:

Accept Additional Collateral
When real estate is offered as additional collateral for a business loan, both the
time and expense involved in obtaining an appraisal from a certified or licensed
real estate appraiser may discourage a bank or thrift from taking the collateral,
may increase the cost of credit significantly, or even may cause the loan not to be
In some such cases, the real estate appraisal requirement is
counterproductive from a safety and soundness perspective. Moreover, the
constraint on credit flows to sound businesses may be substantial. Accordingly,
the agencies will alter their real estate appraisal rules so as not to require an
appraisal by a licensed or certified appraiser for such loans.


Reexamine Appraisal Thresholds
Appraisals conducted by licensed and certified real estate appraisers, even on real
estate of modest vatue can be quite costly. In the case of a smaller loan, the
requirement of an appraisal by a licensed or certified real estate appraiser may
make a sound loan uneconomical. Accordingly, the agencies will reexamine their
existing rules to make certain that thresholds below which formal appraisals are
not needed are reasonable.


Limit Periodic Appraisals
In some cases real estate appraisals have been required after a loan has been made,
and in circumstances where the appraisal did not add to the safety and soundness
of the loan. Accordingly, the agencies will work to make certain that real estate
appraisals are required after a loan is made only when clearly needed for safety
and soundness purposes, provided of course, that all requirements under law have
been met.

Changing Rules on Financing of Other Real Estate Owned. Currently, accounting and
other rules may discourage banks and thrifts from providing financing to borrowers who
wish to purchase real estate classified as Other Real Estate Owned. The agencies will
review rules relating to the reporting treatment and classification of such loans and make
appropriate changes to facilitate financing to creditworthy borrowers, consistent with safe
and sound banking and accounting practices.
Reviewing In Substance Foreclosure Rules. The inappropriate use of in substance
foreclosure rules have required foreclosure valuation treatment of loans when borrowers
were current on principal and interest payments and could reasonably be expected to repay
the loan in a timely fashion. The agencies will work with the appropriate authorities to
alter that treatment and to coordinate a change in accounting principles and reporting
Avoiding Liquidation Values on Real Estate Loans. Loans secured by real estate
should be evaluated based on the borrower’s ability to pay over time, rather than a
presumption of immediate liquidation. The agencies will work with their examination
staffs to ensure that real estate loans are evaluated in accordance with agency policy.

Enhancing and Streamlining Appeals and Complaint Processes

Appeals. It is important for bankers to have an avenue by which they can obtain a
review of an examiner’s decision when they wish. For that reason, each of the agencies
has established an appeals process. To ensure the effectiveness of those processes, each
agency will take appropriate steps to ensure that its appeals process is fair and effective.
In particular, each agency will ensure that its process provides a fair and speedy review
of examination complaints and that there is no retribution against either the bank or the
examiner as the result of an appeal.
Complaints. Each of the agencies has a process to handle more general complaints from
the institutions they regulate and from the general public. Although the volume of such
complaints can be high, each agency recognizes that reviewing and responding to these
complaints is an important element of proper supervision. The agencies are particularly
concerned that complaints of discriminatory lending practices be handled with the utmost
seriousness and on an expedited basis.
Accordingly, the agencies will review their complaint processes to improve both the care
with which complaints are scrutinized and the timeliness of responses.





Improving Examination Process and Procedures

Reducing the Burden of the Examination Process. A proper examination of a bank or
thrift by its very nature involves some disruption to the examined institution. Such
disruptions, however, are costly to the institution and can interfere with its credit
functions. It is highly desirable that examination disruptions be minimized.
Accordingly, the agencies have agreed to intensify efforts to minimize such disruptions
and, in particular, to take the following steps: (i) eliminate duplication in examinations
by multiple agencies, unless clearly required by law, (ii) increase coordination of
examinations among the agencies when duplication is required, and (iii) establish
procedures to centralize and streamline examination in multibank organizations.
Refocusing the Examination Process. If examinations are to fulfill their functions in
the areas of safety and soundness, fair lending, and consumer protection compliance, it
is important constantly to reexamine the elements of the examination to determine whether
the process is effective. Similarly, regulations and interpretations must continually be
assessed to determine whether they are fulfilling these functions.
To improve the regulatory process, the agencies have agreed to heighten their emphasis
in examinations on risk to the institution and to issues involving fair lending in place of
areas that have become less productive over time. Agency policies and procedures will
be reviewed with this focus in mind.
Reducing Regulatory Uncertainty. Uncertainty is part of the regulatory burden that
banks and thrifts face and that contributes to their reluctance to make some credits
available. This uncertainty can stem from ambiguous language in regulations and
interpretations, from delays in publishing regulations and interpretations, and from failures
to follow uniform examination standards that clearly reflect agency policies.
Accordingly, the agencies will review their regulations and interpretations to minimize
ambiguity wherever possible and will step up efforts to publish regulations and
interpretations required by law or sound regulatory practice. In addition, the agencies will
reemphasize to their examiners to follow agency policies and guidelines carefully and
accurately in carrying out examinations and reviewing applications. The agencies will
make every effort to ensure that examination and application processing is performed
uniformly across the country.

Continuing Further Efforts and Reducing Burden

Further Efforts. Additional items will be reviewed for possible change. One item that
will be reviewed relates to the treatment of partially charged-off loans. Under current
practice delinquent loans that have been partially charged off cannot be returned to




performing status even when the borrower is able to, and fully intends to, pay the
remaining interest and principal to the bank in a timely fashion. The agencies will work
to develop common standards for determining when a loan may be returned to accrual
Paperwork Burden. No good is served by forcing banks to bear an excessive regulatory
paperwork burden. Accordingly, the agencies have begun and will continue to review all
paperwork requirements to eliminate duplication and other excesses that do not contribute
substantially to safety and soundness.
Regulatory Burden. It is not paperwork alone that unnecessarily burdens banks and
thrifts. Regulations and interpretations also may be unnecessarily burdensome. In some
cases the passage of time has made regulations outmoded. In other cases the regulations
may not have fulfilled their goals.
Accordingly, the agencies also have begun and will continue to review all regulations and
interpretations to minimize burden while maintaining safety and soundness standards.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102