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Federal Reserve Bank

OF DALLAS
ROBERT

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

P R E S ID E N T
AND

C H IE F E X E C U T IV E

O F F IC E R

April 9, 1993

DALLAS, TEXAS 7 5 2 2 2

Notice 93-44
TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Interagency Policy Statement
on Credit Availability
DETAILS

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 further details on the
implementation of their March 10, 1993, program to increase credit availabil­
ity. The policy statement outlines changes in the area of loan documentation.
The strongest banks and thrifts, those with regulatory ratings of 1
or 2 and with adequate capital, will now be able to make and carry some loans
to small- and medium-sized businesses and farms with only minimal documenta­
tion. The total of such loans at an institution will be limited to an amount
equal to 20 percent of its total capital.
Eligible banks and thrifts will be
encouraged to make these based on their own best judgment as to the credit­
worthiness of the loans and the necessary documentation. These loans will be
evaluated solely on the basis of performance and will be exempt from examiner
criticism of documentation.
Each minimal documentation loan is subject to a maximum loan size of
$900,000 or 3 percent of the lending institution’s total capital, whichever is
less.
If a borrower has multiple loans in the exempt portion of the portfo­
lio, those loans must be aggregated before the maximum is applied.
Loans to
institution insiders— executive officers, directors, and principal sharehold­
ers and their related interests— are ineligible for inclusion, as are loans
that are already delinquent.
The package also offers some relief for banks that do not qualify
for the program and for loans that are not in the exempt portion of a b a n k ’s
portfolio. The policy statement also includes guidelines that provide
institutions some flexibility in applying their documentation policies for
small- and medium-sized business and farm loans without examiner criticism.

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 (FedHistory@dal.frb.org)

- 2 -

The agenc i e s ’ initiatives are directed at eliminating unnecessary
documentation and reducing costs to lending institutions and the time it takes
to respond to credit applications. The Office of Thrift Supervision will soon
issue a regulation to amend its current loan documentation requirements to
comply with the statement.
For banks, the program requires no change in
existing regulations and is effective immediately.
ATTACHMENT
The interagency policy statement on documentation of loans is
attached.
MORE INFORMATION
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 Documentation
for Loans to Small- and Medium-sized Businesses and Farms
March 30, 1993

Introduction
Problems with the availability of credit over the last few years have been especially significant
in the area of small- and medium-sized business and farm lending. 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 and the Federal Deposit Insurance Corporation Improvement Act.
The four federal banking agencies — 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 — expect small- and medium-sized business and farm loans, like
all credits, to be made consistent with sound underwriting policies and loan administration
procedures. The agencies are concerned, however, that institutions may perceive that the
agencies are requiring a level of documentation to support sound small- and medium-sized
business and farm loans that is in excess of what is necessary to making a sound credit decision.
Unnecessary documentation raises the cost of lending to small- and medium-sized businesses and
farms, results in delays in bank lending decisions, and may discourage good borrowers from
applying. The agencies believe that the elimination of unnecessary documentation for loans to
small- and medium-sized businesses and farms will reduce costs to the institution and the time
it takes to respond to credit applications from small- and medium-sized businesses and farms
without adversely affecting the institution’s safety and soundness.
The federal banking agencies expect financial institutions to maintain documentation standards
that are consistent with prudent banking policies. However, the maintenance of documentation
beyond that necessary for a credit officer to make a sound credit decision and to justify that
decision to the institution’s management adds to loan administration costs without improving the
credit quality of the institution. Unnecessary documentation impedes the institution from

responding in a timely and prudent maimer to the legitimate credit needs of small- and medium­
sized businesses and farms in its community. Accordingly, the agencies are taking steps to
correct any misunderstanding of regulatory requirements and to reduce regulatory impediments
to lending to creditworthy small- and medium-sized businesses and farms.

Documentation Exemption for Small- and Medium-sized Business and Farm
Loans
Well- or adequately capitalized institutions with a satisfactory supervisory rating will be
permitted to identify a portion of their portfolio of small- and medium-sized business and farm
loans that will be evaluated solely on performance and will be exempt from examiner criticism
of documentation. While bank and thrift management will retain responsibility for the credit
quality assessment and loan loss allowance for these loans, the lending institution will not be
subject to criticism for the documentation of these loans.
This exemption will be available only to institutions that are well- or adequately capitalized
institutions under each agency’s regulations implementing section 38 of the Federal Deposit
Insurance Act and that are rated CAMEL or MACRO 1 or 2. These institutions are by
definition those that have demonstrated sound judgment and good underwriting skills; moreover,
their strong capital position insulates the deposit insurance funds from potential losses that may
be incurred through small- and medium-sized business and farm lending.
To qualify for the exemption, each loan may not exceed the lesser of $900,000 or three percent
of the institution’s total capital, and the aggregate value of the loans may not exceed 20 percent
of its total capital. In addition, loans selected for this exemption by an institution must not be
delinquent as of the selection date, and each institution must comply with applicable lending
limits and other laws and regulations in making these loans. Furthermore, such loans may not
be made to an insider.
Small- and medium-sized business and farm loans that do not meet the criteria for exemption set
forth in this policy statement would continue to be reviewed and classified in accordance with
the agencies’ existing policies.
The details of the exemption are as follows:
•

D ocum entation exem ption. Each institution eligible for the exemption provided in this
policy statement may assign eligible loans, subject to the aggregate limit on such eligible
loans, to an exempt portion of the portfolio. Loans assigned to this exempt portion will
not be reviewed for the completeness of their documentation during the examination of
the institution. Assignments of loans to the exempt portion shall be made in writing, and
an aggregate list or accounting segregation of the assigned loans shall be maintained,
including the performance status of each loan.

•

R estrictions on loans in the exem pted portion of th e portfolio. The institution must
fully evaluate the collectibility o f these loans in determining the adequacy of its
allowance for loan and lease losses (ALLL) or general valuation allowance (GVA)
attributable to such loans and include this evaluation in its internal records of its
assessment of the adequacy of its ALLL or GVA. Once a loan in the exempt portion of
the portfolio becomes more than 60 days past due, the loan may be reviewed and
classified by an examiner; however, any decision to classify would be based on credit
quality and not on the level of documentation.

•

Eligible institutions. An institution is eligible for the documentation exemption if (1)
pursuant to the regulations adopted by the appropriate federal banking agency under
section 38 of the FDI Act, the institution qualifies as well- or adequately capitalized, and
(2) during its most recent report of examination, the institution was assigned a composite
CAMEL or MACRO rating of 1 or 2.

•

Ineligible loans. Loans to any executive officer, director, or principal shareholder of
the institution, or any related interest of that person, may not be included in the basket
of loans.

•

A ggregate lim it on loans. The aggregate value of all loans assigned to the basket of
loans provided for in the exemption may not exceed 20 percent of the institution’s total
capital (as defined in the capital adequacy standards of the appropriate agency).

•

Lim it on value of individual loan. A loan, or group of loans to one borrower, assigned
to the basket of loans provided for in the exemption may not exceed $900,000 or 3
percent of the institution’s total capital (as defined in the capital adequacy standards of
the appropriate agency), whichever is the smaller amount.

•

T ransition from eligibility to ineligibility. An institution that has properly assigned
loans to the exempt portion of its portfolio pursuant to this statement but subsequently
fails to qualify as an eligible institution may not add new loans (including renewals) to
this category.

Treatment of Small- and Medium-sized Business and Farm Loans Not
Qualifying for Exemption
The agencies will continue current examination practices with regard to documentation of smalland medium-sized business and farm loans at institutions not qualifying for the exemption and
loans at qualifying institutions that are not assigned to the exempt basket. The guiding principle
of agency review will continue to be that each insured depository institution should maintain
documentation that provides its management with the ability to:

(a)

make an informed lending decision and to assess risk as necessary on an ongoing
basis;

(b)

identify the purpose of the loan and the source of repayment;

(c)

assess the ability of the borrower to repay the indebtedness in a timely manner;

(d)

ensure that a claim against the borrower is legally enforceable; and

(e)

demonstrate appropriate administration and monitoring of a loan.

In prescribing the documentation necessary to support a loan, an institution’s policies should take
into account the size and complexity of the loan, legal requirements, and the needs of
management and other relevant parties (such as loan guarantors).
In applying these standards, the agencies will continue to recognize the difficulty and cost of
obtaining some documents from small- and medium-sized businesses and farms. These
difficulties and costs could result in some deviations from an institution’s own loan
documentation policy for small- and medium-sized business and farm lending. Such deviations
are frequently based on past experience with the customer. In such cases, the loan will not be
criticized if the examiner concurs that sufficient information exists to serve as a basis for an
informed credit decision.

Implementation
This policy statement will take effect immediately upon issuance. However, the agencies will
monitor how qualifying institutions implement its provisions and how those institutions and the
loans they designate for inclusion in the exempt basket perform. Changes to this policy
statement may be made based on the agencies’ experience.

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