Washington regulators are hurting small banks, and by extension the communities they serve, according to Florida Rep. Bill Posey, whose proposed Common Sense Economic Recovery Act would prohibit bureaucrats from micromanaging loan classifications.
“One egregious example is a hotel in my district at a community bank,” Posey said in an interview with the Washington Examiner. “The remaining balance on their loan was $800,000, which was about 30 percent of the value of the hotel. The loan had been in effect for over 12 years.
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“They would eat dirt, but they’ll make their payments. If they were ever behind for 30 cents on the dollar, there’d be a two-mile-long line to buy up this asset,” he added. “It had never been late. The regulators said we’re going to put this on nonaccrual, because given this economy, we don’t think they should be able to make the payments.”
Nonperforming loans, traditionally defined as 90 days of nonpayment, become classified by regulators as nonaccrual loans, jeopardizing a bank’s ability to record interest. The problem, Posey said, is that regulators on the Financial Stability Oversight Council, which arose out of a 2010 law signed by President Obama, also have authority to define nonaccrual in other ways.
“They don’t have the same personal examination of individual files at big banks that they do at small banks. At small banks they start looking at files and see something like, this couple was laid off, and say that’s a bad loan. You say, ‘No, their parents made the payments until they had new jobs. The loan was never in jeopardy. Every payment was made on time.’ They say, ‘We don’t care, we’re going to put that on nonaccrual,'” the Florida Republican explained.
“So you also have loan modifications here. That’s the sign of a bad loan. You say it’s because we had these people on 12 years ago at 15 percent, we’d have to get 5 percent now. So we modified it so we could keep the business and they would be happy. Regulators say we’re going to call that a bad loan,” he added.
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Posey’s bill, which he has proposed for the past three sessions of Congress, would give small financial institutions greater flexibility to defy the nonaccrual classification. If a borrower has not been delinquent on a payment by more than 30 days in the preceding six months, and the payments are being made pursuant to the contractual terms, loans would be permitted to remain on accrual status.
“If the regulator puts a loan on nonaccrual, it means they cannot earn any interest off of it,” Posey said. Every penny they pay has to go to principal until it’s paid off. Then at the tail end, the banks get their interest. Since banks only operate off of interest, that’s how you bankrupt banks.”
Despite bipartisan support for his proposal in the past, Posey said, the legislation faces an uphill battle. Nonetheless, he plans to propose it again next year.
“If you’re from Florida, you read regularly about banks that have closed,” he added. “You’ll see, ‘They have $750 million in assets, $450 million in liabilities.’ … “That’s the kind of stuff I’m here to change,” Posey said.
