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Stop redlining small businesses, U.S. bank regulators tell lenders

February 5, 2010 |  7:05 pm

Federal banking regulators are trying a new push to encourage banks to make small-business loans.

In a joint statement issued Friday, the Federal Reserve, the Federal Deposit Insurance Corp. and other agencies sought to ease banks’ concern about being slapped down for making loans that might be perceived by regulators as high risk.

The statement emphasizes that “financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition will not be subject to supervisory criticism for small business loans made on that basis.”

Fedfacade2 Normally, it would seem silly that banks would have to be reminded that they can make “prudent” loans. But this is what a financial-system meltdown does to the lenders -- and regulators -- who survive it.

The Fed and its cohorts also tried to encourage lending in a statement they issued in November 2008, in the depths of the credit collapse. That one must have fallen on a lot of deaf ears. Total loans to small businesses and farms fell by 1.8%, or $14 billion, from June 30, 2008, to June 30, 2009, the agencies said.

This time around, regulators specifically appear to be trying to combat small-business redlining. Banks “should not automatically refuse credit to sound borrowers because of a borrower’s particular industry or geographic location,” the statement said.

Community banks have been pointing the finger back at regulators. Treasury Secretary Timothy F. Geithner on Tuesday faced angry senators who said overly aggressive bank supervisors were forcing community banks to curtain lending to small businesses.

Federal regulators were “stopping all lending to the people who absolutely need the lending," Sen. Jim Bunning (R-Ky.) told Geithner.

In the statement, the agencies said that they were working “to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers.”

Besides the Fed and the FDIC, other agencies behind the statement are the National Credit Union Administration, the Comptroller of the Currency, the Office of Thrift Supervision and the Conference of State Bank Supervisors.

-- Tom Petruno

Photo: The Federal Reserve's headquarters in Washington. Credit: Andrew Harrer / Bloomberg News