I. INTRODUCTION
On March 10, 1993, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), and the Office of Thrift Supervision (OTS) issued an interagency policy statement to implement the Administration’s recent proposal to deal with the problems of credit availability. Further details of the policy statement were issued on March 30, 1993, which established new documentation standards for certain types of small business loans. The policy statement took effect for banks immediately.
II. DOCUMENTATION EXEMPTION FOR SMALL – AND MEDIUM-SIZED BUSINESS AND FARM LOANS
A. Documentation Exemption
The policy allows certain institutions (those with a MACRO/CAMEL rating of 1 or 2 and which are well or adequately capitalized) to make and carry some loans to small- and medium-sized businesses and farms with only minimal loan documentation. Eligible institutions 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 exempted from examiner criticism of documentation.
To qualify for the documentation exemption, no individual loan may exceed the lesser of $900,000 or three percent of the institution’s total capital, and the aggregate value of all such loans may not exceed twenty percent of the institution’s total capital. 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.
The policy enables eligible institutions to make these loans on their own best judgment as to the creditworthiness of the borrower and the necessary documentation. An institution assigning a loan to the exempt portion of its portfolio must do so in writing, and must maintain an aggregate list or accounting segregation of the assigned loans, including the performance status of each loan. Loans in the exempt portion must be fully evaluated for collectability in determining the adequacy of the institution’s allowance for loan and lease losses and its general valuation allowance. If a loan in the exempt portion becomes more than 60 days past due the loan may be reviewed and classified by examiners, however, the classification would be based only on credit quality, not the level of documentation.
An institution that has properly assigned loans to the exempt portion of its portfolio pursuant to this policy statement but which subsequently fails to qualify as an eligible institution may not add new loans (including renewals) to this category.
B. Treatment of Small- and Medium-Sized Business and Farm Loans Not Qualifying for Exemption
The agencies have indicated that they will continue current examination practices with regard to documentation requirements for small- and 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 access 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) insure 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 which does not qualify for the documentation exemption, 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).
The policy statement notes that some types of documentation can be difficult and costly to obtain from small-and medium-sized businesses and farms which can result in deviations from the bank’s own documentation policy. According to the policy statement, these loans will not be criticized if the examiner concurs that sufficient information exists for an informed credit decision to be made.