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It's Getting Easier to Borrow from a Bank

It's getting easier to borrow money from a bank, according to reports from the Office of the Comptroller of the Currency, the North Carolina Bankers Association, and the American Bankers Association

Banks are easing loan terms to stay competitive as creditworthy borrowers are becoming more common. Here are seven ways bankers are loosening credit criteria, according to the cognoscenti:
 - Longer Amortization: Banks are extending the term of loans to as much as 25 years, thereby lowering borrowers’ monthly payments.  This increases the lender's exposure to risk and ties up capital.

 - Limited Guarantees: Some banks are the amount subject to a personal guarantee.

 - Extending the Duration of Fixed-Rate Loans: Some banks are extending the term of fixed-rate loans, especially on commercial equipment. (Of course, longer terms at today's low rates could spell trouble for banks if the Fed raises rates quickly, as noted below.)

 - Higher Leverage Ratios: Lenders are tolerating higher loan-to-value ratios, in some cases up to 80%.

 - Lower Debt-Service Coverage Ratios: Some banks are reducing the debt-service coverage ratio, though regulators would like to see them raised.  (One bank lost out on the opportunity to make a seven-figure commercial loan because another lender was willing to waive all debt service coverage requirements.)  The OCC reported today that the average total-debt-to-EBITDA ratio rose to 4.7, the highest since 2007. The OCC believes that covenants should be imposed on companies in most industries that limit this ratio to six times EBITDA.

 - Relaxed Collateral Requirements: Some lenders are lowering collateral requirements on commercial real estate loans by lowering the required cap rate.

 - Fee Waivers: Banks are reportedly more willing to waive or lower fees.

The relaxation in lending standards prompted the Office of the Comptroller of Currency to issue a report today warning of an "erosion in underwriting standards."  The OCC is concerned that banks have taken on more risk than is prudent.  Key conclusions in the report include the following:
  • Competition for lending opportunities is intensifying.
  • Lenders are loosening underwriting standards, particularly in indirect auto, leveraged lending, and other commercial loans.
  • Banks that extend loan maturities could face significant problems depending on the severity and timing of interest rate moves by the Federal Reserve Board. 
The Wall Street Journal reported today that "so-called covenant-lite leveraged loans, which have fewer protections for lenders, totaled $258 billion in 2013, nearly equal to the total amount issued between 1997 and 2012." 

Conclusion:  This is good news for borrowers, but may signal an escalation in already-intense competition among lenders and further regulatory scrutiny for banks.

Sources: American Banker, NC Bankers Association, WSJ, and OCC.

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