Office of the Comptroller of the Currency

Federal Deposit Insurance Corporation

Federal Reserve Board

Office of Thrift Supervision

Interagency Policy Statement on Documentation for Loans to Small- and
Medium-sized Businesses and Farms

March 30, 1993

Introduction

Problems with the availability of credit over the last few years have
been especially significant in the area of small- and medium-sized
business and farm lending. This reluctance to lend may be attributed to
many factors, including general trends in the economy; a desire by both
borrowing and lending institutions to improve their balance sheets; the
adoption of more rigorous underwriting standards after the losses
associated with some laxities in the 1980s; the relative attractiveness
of other types of investments; the impact of higher capital
requirements, supervisory policies, and examination practices; and the
increase in regulation mandated by recent legislation \-- specifically,
the Financial Institutions Reform, Recovery, and Enforcement Act and the
Federal Deposit Insurance Corporation Improvement Act.

The four federal banking agencies \-- the Office of the Comptroller of
the Currency, the Federal Deposit Insurance Corporation, the Board of
Governors of the Federal Reserve System, and the Office of Thrift
Supervision \-- expect small- and medium-sized business and farm loans,
like all credits, to be made consistent with sound underwriting policies
and loan administration procedures. The agencies are concerned, however,
that institutions may perceive that the agencies are requiring a level
of documentation to support sound small- and medium-sized business and
farm loans that is in excess of what is necessary to making a sound
credit decision. Unnecessary documentation raises the cost of lending to
small- and medium-sized businesses and farms, results in delays in bank
lending decisions, and may discourage good borrowers from applying. The
agencies believe that the elimination of unnecessary documentation for
loans to small- and medium-sized businesses and farms will reduce costs
to the institution and the time it takes to respond to credit
applications from small- and medium-sized businesses and farms without
adversely affecting the institution\'s safety and soundness.

The federal banking agencies expect financial institutions to maintain
documentation standards that are consistent with prudent banking
policies. However, the maintenance of documentation beyond that
necessary for a credit officer to make a sound credit decision and to
justify that decision to the institution\'s management adds to loan
administration costs without improving the credit quality of the
institution. Unnecessary documentation impedes the institution from
responding in a timely and prudent manner to the legitimate credit needs
of small- and medium- sized businesses and farms in its community.
Accordingly, the agencies are taking steps to correct any
misunderstanding of regulatory requirements and to reduce regulatory
impediments to lending to credit worthy small- and medium-sized
businesses and farms.

Documentation Exemption for Small- and Medium-sized Business and Farm
Loans

Well- or adequately capitalized institutions with a satisfactory
supervisory rating 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 exempt from examiner
criticism of documentation. While bank and thrift management will retain
responsibility for the credit quality assessment and loan loss allowance
for these loans, the lending institution will not be subject to
criticism for the documentation of these loans.

This exemption will be available only to institutions that are well- or
adequately capitalized institutions under each agency\'s regulations
implementing section 38 of the Federal Deposit Insurance Act and that
are rated CAMEL or MACRO 1 or 2. These institutions are by definition
those that have demonstrated sound judgment and good underwriting
skills; moreover, their strong capital position insulates the deposit
insurance funds from potential losses that may be incurred through
small- and medium-sized business and farm lending.

To qualify for the exemption, each loan may not exceed the lesser of
\$900,000 or three percent of the institution\'s total capital, and the
aggregate value of the loans may not exceed 20 percent of its total
capital. In addition, 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.

Small- and medium-sized business and farm loans that do not meet the
criteria for exemption set forth in this policy statement would continue
to be reviewed and classified in accordance with the agencies\' existing
policies.

The details of the exemption are as follows:

Documentation exemption. Each institution eligible for the

exemption provided in this policy statement may assign eligible

loans, subject to the aggregate limit on such eligible loans, to an

exempt portion of the portfolio. Loans assigned to this exempt

portion will not be reviewed for the completeness of their

documentation during the examination of the institution.

Assignments of loans to the exempt portion shall be made in

writing, and an aggregate list or accounting segregation of the

assigned loans shall be maintained, including the performance

status of each loan.

Restrictions on loans in the exempted portion of the portfolio.

The institution must fully evaluate the collectibility of these

loans in determining the adequacy of its allowance for loan and

lease losses (ALLL) or general valuation allowance (GVA)

attributable to such loans and include this evaluation in its

internal records of its assessment of the adequacy of its ALLL or

GVA. Once a loan in the exempt portion of the portfolio becomes

more than 60 days past due, the loan may be reviewed and classified

by an examiner; however, any decision to classify would be based on

credit quality and not on the level of documentation.

Eligible institutions. An institution is eligible for the

documentation exemption if (1) pursuant to the regulations adopted

by the appropriate federal banking agency under section 38 of the

FDI Act, the institution qualifies as well- or adequately

capitalized, and (2) during its most recent report of examination,

the institution was assigned a composite CAMEL or MACRO rating of 1

or 2.

Ineligible loans. Loans to any executive officer, director, or

principal shareholder of the institution, or any related interest

of that person, may not be included in the basket of loans.

Aggregate limit on loans. The aggregate value of all loans

assigned to the basket of loans provided for in the exemption may

not exceed 20 percent of the institution\'s total capital (as

defined in the capital adequacy standards of the appropriate

agency).

Limit on value of individual loan. A loan, or group of loans to

one borrower, assigned to the basket of loans provided for in the

exemption may not exceed \$900,000 or 3 percent of the institution\'s

total capital (as defined in the capital adequacy standards of the

appropriate agency), whichever is the smaller amount.

Transition from eligibility to ineligibility. An institution that

has properly assigned loans to the exempt portion of its portfolio

pursuant to this statement but subsequently fails to qualify as an

eligible institution may not add new loans (including renewals) to

this category.

Treatment of Small- and Medium-sized Business and Farm Loans Not
Qualifying for Exemption

The agencies will continue current examination practices with regard to
documentation of 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 assess 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;

\(d\) ensure 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, 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).

In applying these standards, the agencies will continue to recognize the
difficulty and cost of obtaining some documents from small- and
medium-sized businesses and farms. These difficulties and costs could
result in some deviations from an institution\'s own loan documentation
policy for small- and medium-sized business and farm lending. Such
deviations are frequently based on past experience with the customer. In
such cases, the loan will not be criticized if the examiner concurs that
sufficient information exists to serve as a basis for an informed credit
decision.

Implementation

This policy statement will take effect immediately upon issuance.
However, the agencies will monitor how qualifying institutions implement
its provisions and how those institutions and the loans they designate
for inclusion in the exempt basket perform. Changes to this policy
statement may be made based on the agencies\' experience.