![\"loan-underwriting-standards\"](\"https:\/\/whitlockco.com\/wp-content\/uploads\/2018\/08\/loan-underwriting-standards-300x200.jpg\")
written by Kami Bailey<\/p>\nwritten by Kami Bailey<\/p>\n
The economic recovery that began in the summer of 2009 passed another significant milestone in April when it became the second-longest U.S. expansion on record. If the expansion makes it to10 years next summer, it will be the longest expansion in U.S. history.<\/p>\n
While this is good news for the broad economy, but it should raise caution for community banks. Historically speaking, small business loans that go bad are often made during the last couple of years of a recovery\u2014which could be where we are right now.<\/p>\n
Regulatory Concerns<\/strong> The regulators want banks to understand the potential credit risks that could arise if economic conditions suddenly take a turn for the worse.<\/p>\n Loan Underwriting Practices<\/strong> Other lending practices the regulators have expressed concerns about include the following:<\/p>\n Current economic conditions can make it easy for banks to make loans that some borrowers wouldn\u2019t qualify for in a more normal environment. For example, low interest rates, combined with interest-only terms and longer amortizations, may result in an acceptable debt service coverage ratio for borrowers with high levels of debt. And low cap rates can yield higher-than-normal appraised values for commercial real estate pledged as collateral.<\/p>\n Performing a Reality Check<\/strong> Funded debt (senior interest-bearing obligations) \/ EBITDA<\/p>\n Using this formula removes the impact of low interest rates, extended amortizations, and high loan-to-value ratios from the equation. The regulators consider a leveraged EBITDA ratio of 6x or higher to be highly leveraged. Most banks, meanwhile, should want to see a leveraged EBITDA ratio that\u2019s no higher than 3x or 4x.<\/p>\n Re-examine Underwriting Standards Now<\/strong> Please contact us if you have any questions 417-881-0145.<\/p>\n","protected":false},"excerpt":{"rendered":" written by Kami Bailey The economic recovery that began in the summer of 2009 passed another significant milestone in April when it became the second-longest U.S. expansion on record. If the expansion makes it to10 years next summer, it will be the longest expansion in U.S. history. While this is good news for the broad […]<\/p>\n","protected":false},"author":9,"featured_media":6788,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":""},"categories":[30,39],"tags":[],"acf":[],"yoast_head":"\n
\nThe regulators have recently expressed concerns about this issue. In the recently published Semiannual Risk Perspective, the Office of the Comptroller of the Currency (OCC) National Risk Committee (NRC) encouraged lenders to \u201cfocus on maintaining sound credit standards within risk tolerances\u201d considering the lengthy expansion.<\/p>\n
\nOne of the concerns that regulators voice involves less-stringent loan underwriting practices that community banks have adopted. Including inappropriate financing of working capital, offering longer-term maturities on fixed-rate loans, aggressively valuing collateral, overly relying on collateral and owner guarantees, offering interest-only terms, and failing to establish and enforce financial performance expectations and reporting requirements for borrowers.<\/p>\n\n
\nGiven these concerns, now might be a good time to perform a \u201creality check\u201d on your bank\u2019s loan underwriting standards. One way to do this is to adopt a new formula that uses leveraged EBITDA to measure cash flow.<\/p>\n
\nDon\u2019t wait until problem loans start to rear their ugly head\u2014by then, it might be too late to act. Re-examining your loan underwriting standards considering the regulators\u2019 concerns could help avoid major problems down the road.<\/p>\n