Banks Say Loans Available, But (Wishful) Customers Beg to Differ

By Mark R. Smith, EDITOR-IN-CHIEF

Stan Sersen is a small businessman with plans of expansion. He has good credit and ample collateral. A few years ago, that would have been enough to get him the loan he wants to expand his business.
But not today.
Sersen, owner of the EnviroCenter in Jessup, has been trying to build 16,000 additional square feet of office space that he believes would lease quickly, even in today's tough market. To do so, he needs capital.
"We were working with a number of banks about 18 months ago, and we ended up working with PNC," he said, "but PNC withdrew - since the appraisal of the expansion came in lower than what we could even build it for."
So Sersen approached other local banks. "They only want to lend if your building is 51% owner occupied," he said. "If it's any less, they don't want to hear it because the rental market is down."
Therein lies much of the dilemma: While many banks have taken Trouble Asset Relief Program (TARP) money that was intended to spur lending, that really hasn't happened due to tightened (some say air-tightened) lending standards. The result? Even established business operators are being repeatedly rejected in their attempts to garner loans.

Standards: Too Tight?
Sersen is hardly alone in his frustration; his tale is but one example of a trend that has reached the point that lawmakers are working to find ways to get loans flowing again as the economy creeps out of a crippling recession.
In some ways, the shift in lending is "largely a return to traditional lending standards," said Anirban Basu, president and CEO of Sage Policy Group in Baltimore. "While there has been much anger directed at banks that have gotten TARP money, stricter lending practices are what this country requires" to rise from its economic dilemma.
"Practices of the last decade were not sustainable and significantly contributed to the depth of the downturn that began in December 2007," said Basu, though he did add one caveat: "That said, anecdotal evidence tells you that certain people who appear to be eligible for credit are being repeatedly denied. Though the response of the banking sector is largely positive," he said, "there is evidence of a degree of overreaction."
That's Sersen's belief, too.
"The commercial appraisers are really undervaluing property because they're saying that if the banks had to take a property back, they would have to unload it for 50 cents on the dollar, literally," he said, "and they'll never take that risk."
Properties that were valued at $2 million two years ago are now valued at $1 million, he said. "I don't know if the appraisers are doing that because the banks didn't want to lend the money in the first place, but the banks are using the appraisers as an excuse to avoid making loans."
The banks used to loan 80% of the value of the property, so there was an 80:20 loan-to-value ratio. "Now, they're looking at 60% loan-to-value ratio, which has killed many, many deals on the commercial side," Sersen said. "What has also happened is that banks are using the TARP money not to make loans, but to keep their balance sheets up."

An Opposing Viewpoint
Still, Sersen can see some light on the horizon, as legislators are becoming concerned about the slow-to-reignite lending market. "There are some SBA programs that are being started to loosen it up," he said.
Bank executives acknowledge that lending standards have tightened, though to what degree seems a matter of perception.
For instance, Kathleen Murphy, CEO of the Maryland Banker's Association in Annapolis, pointed out that lending among Maryland's 137 FDIC banks is up 6% from third quarter of '08 to the third quarter of '09.
"Banks grow based on deposits," said Murphy. "Deposit growth during that same period is up 19%, and we know that it's in the bank's best interest to deploy those deposits through loans."
But she stressed that, in today's economic environment, banks make loans "to credit-worthy borrowers" - and who is credit-worthy is open to interpretation, especially give the Wall Street meltdown, plunging real estate values and the jobless rate that is about 10% in Maryland.
"The National Federation of Independent Business has said that, basically, many businesses today are not prepared to take on additional risk," Murphy said. "There is actually much lower demand for credit than there has been in the past."
Murphy also thinks that "there is a misnomer about TARP. Of the 137 Maryland banks, 13 participated in the TARP program. When a bank got a TARP infusion, it still had to raise appropriate deposits to start lending the money.
"Remember, before the recession started, there were many other institutions aside from banks that were making loans," she said, such as independent finance companies, conduit lenders (specialty independent lenders that rely on the secondary commercial mortgage market) and private mortgage companies.

The Payback
Mary Ann Scully, president and CEO of Howard Bank, took Murphy's observations further.
"We took Capital Purchase Program money since we can always use it for reserves," Scully said, noting that it is also intended to be used for continuation of the bank's lending efforts.
"We think that the economy will improve more quickly if banks continue to lend prudently," she said, pointing out that Howard Bank's loans were up 25% from 2008 to 2009.
However, that doesn't mean that everyone ends up happy. "There were still people that we had to say 'no' to if we felt that they couldn't pay us back," Scully said. "There's nothing worse than making a loan to someone who can't pay you back, since it's bad for them and might lead to their default."
Scully stressed that there are two sides to this story.
"Some banks are not as interested in expanding their loan portfolio today because they don't have the reserves or the desire," she said, adding, "consumers might not be aware of what the banks want today."
Several years ago, the banks would simply consider the credit score and collateral, Scully said. "But all a credit score tells you is how [a potential client] has serviced their debt. A score of 750 for one person might indicate that they are very comfortable in paying back a loan; for someone else, it might mean that they are good at balancing various pools of debt - and might use one to pay off another."
Unfortunately, she said, the current loan environment evolved as the banking industry "got into a bad habit several years ago of not even asking for a properly filled out earnings statement and did not have anyone verify the loans," she said.
"These 'liar' loans," as Scully called them, "didn't come from banks, but other types of lenders. They're the classic example of people who could exaggerate their income and never have to verify it for the loan representative."

Doing More
There is help on the way. At the Howard County Economic Development Authority (HCEDA), President and CEO Dick Story talked about its new $1 million Catalyst Loan Program (CLP).
"We created this response [to the tight loan market] because the lending environment has changed," said Story, "so if banks need assistance in expanding their comfort zone, we're available to offer loans of $50,000 to $100,000."
The deal calls for banks to offer the HCEDA a letter affirming that they would not make a particular loan without an infusion from the CLP. "All of the deals are originated by the banks," said Story. "We don't have any overhead, because we use the banks' underwriting in approving our part of the financing."
One CLP loan has been made to date: for $50,000, to Andersen-Becker, a manufacturer of high-priced women's apparel in North Laurel - with Howard Bank.
Such programs are a step forward, but more needs to be done, said Maryland Sen. Ben Cardin. "If a small business owner has a good relationship with a community bank and his circumstances have not changed much, he should not have much problem getting a loan, even now," he said. "But if a business is with a larger bank that has gone through major owner or management changes, it's hard to find a bank that will give you a loan."
Cardin has discussed the issue with representatives from the Obama Administration and Federal Reserve Chairman Benjamin Bernanke, and said that the U.S. Senate is considering ways in which it can help to make loans more available.
"In fairness to the administration and the SBA, some things have helped," he said, such as reducing the cost of SBA loans and making the 7A loans guaranteed up to $5 million. "But they need to do more."
Murphy thinks more help is en route. "Our economy is in a different state than it was five years ago," she said. "The lending market will continue to evolve as we work our way into the new economy."