NR 98-14
February 5, 1998

                           Remarks by 

                         Eugene A. Ludwig
                   Comptroller of the Currency

                            before the
               Small Business Banking Issues Forum
                         Washington, D.C.

                         February 5, 1998

It is a genuine pleasure to welcome you all to our meeting on
small business banking -- a subject that is crucial to our
nation's continued economic vitality and opportunity. 

To understand how crucial, just look at the facts and figures.
By Small Business Administration standards, more than 99 percent
of our nation's businesses qualify as "small." The vast majority
are very small -- two-thirds of them employ fewer than five
people. But they make an outsized contribution to our nation's
well-being. Small businesses employ more than half of the
private nonfarm workforce and, combined, generate 51 percent of
our private gross domestic product. Today they produce almost
two-thirds of all new jobs.

The small business community is a big part of the reason why we
have enjoyed an unparalleled economic expansion of the past five
years -- an expansion driven very largely by small business
people like yourselves, especially in the service and technology
areas.    

Small business men and women, in short, are the vehicles for the
nation's initiative and creative imagination. We count on all of
you here to support  that initiative and imagination and to put
it to work -- as you always have. Small firms produce twice as
many product innovations per employee as larger firms. From
small businesses have come innovations as complex as the
artificial heart valve and the optical scanner and as prosaic as
the zipper. From small businesses will undoubtedly come the
product breakthroughs of the future. That will enhance the
American standard of living and ensure the nation's continued
economic success.

Notwithstanding the strength and ingenuity of the small business
sector, we live in turbulent times. The financial turmoil that
today besets so many of the nations of Asia -- nations which not
many months ago were hailed for their economic successes --
reminds us that the future is essentially unknowable. And yet, I
believe that we have much reason for optimism. The reason is
sitting right in this room. Our forum today shows that we are
not resting on our laurels. We came here today because we
recognize that there remains a rich mother lode of ideas and
enterprise in our people -- ideas and enterprise waiting to be
recognized and waiting to be financed. We came here today 
because, despite all that many of our financial institutions
have done already, lack of credit or capital is still an
obstacle that may prevent tomorrow's small business success
stories from being written. And we are here -- all of us
together -- because we understand that through partnerships
between financial providers and small entrepreneurs, all things
are possible for ourselves and for our people. 

I believe we have proved that over the past five years. Five
years ago, we were in the midst of a credit crunch. Many in the
small business community were unable to get the loans they
needed and deserved. Some firms undoubtedly failed as a result.
Yet, as painful as it was for many, the credit crunch experience
reminded us of something terribly important: that financial
institutions and small business need one another -- and so does
the national economy. 

That lesson was on everyone's mind when I became Comptroller of
the Currency, and it led us immediately to develop and implement
a four-point plan to restore the flow of credit into the small
business community. First, we went over our regulatory rule book
with a fine-tooth comb, weeding out or modifying those rules
that seemed to unduly complicate fair access to small business
credit.  Second, we developed innovative new programs to
encourage financial institutions to make those loans.  Third, we
conducted research into the systemic problems that interfere
with the whole process of small business lending. Finally -- and
the one that made all the others possible -- we sought to
stabilize and strengthen the national banking system, so that
banks were once again in position to lend. 

Let me give you some specific examples.
    We liberalized the rules requiring a small business owner
     to obtain a real estate appraisal from a licensed appraiser
     whenever personal real estate was used as collateral for a
     business loan -- a change whose benefits, for those who
     qualify, can be measured not only in savings of dollars but
     also in savings of time -- weeks sometimes, critical weeks
     when loans can be held up awaiting the completion of an
     appraisal. 
    We adopted a low documentation loan program to allow
     highly-rated and well-capitalized banks to make a portion
     of their loans to small and medium-sized businesses --
     loans that examiners would review solely on the basis of
     performance and not on the basis of the documentation in
     the file. These are loans made on the basis of character
     that may not necessarily meet standard requirements for
     collateral or detailed performance plans.  

But nothing, I think, has done more to highlight and promote
that constructive partnership between small business and
financial institutions than our revisions in the Community
Reinvestment Act.  Much has been said, and rightly so, about the
new CRA's emphasis on performance as opposed to paperwork. What
is just as important, in my mind, is that the new CRA takes a
far broader, more holistic view of what really constitutes
community development. It recognizes that small business lending
can be an important component of financial institutions'
commitment to the communities they serve. 

Stimulated by CRA and their own good business sense, financial
institutions have lately demonstrated a renewed commitment to
small business lending. One of the most auspicious developments
in recent years has been the growth of small business finance
intermediaries for institutions that lack the expertise or the
resources to establish special small business lending programs
of their own. Their variety is truly impressive -- and
encouraging.  Lending consortia, loan pools, bank-owned or
affiliated community development corporations, small business
investment companies, community-based micro-enterprise loan
funds -- all these institutional devices are helping to fill the
gaps in the small business lending market.

Thanks to constructive regulation and innovations by lenders and
community development partners, we have made impressive progress
over the past five years in small business finance. Our nation's
banks have reaffirmed their traditional role as a major source
of funding to the small business community. Small business
lending dominates the loan portfolios of many community banks.
As of late last year, more than 60 percent of all small business
credit was originated by commercial banks. Commercial banks also
provided more than half of all loans used to finance the
purchase of equipment and vehicles by small firms. These days,
fewer and fewer small business people are reporting difficulty
in obtaining credit. And bankers, for their part, are finding
that, as a rule, small business loans perform just as well, if
not better, than other components of the loan portfolio.

And the evidence suggests that many of our bankers are not
sitting back passively and waiting for small business customers
to walk through the door. The recent Federal Reserve report to
Congress on the availability of credit to small businesses shows
a new aggressiveness on the bankers' part in seeking out small
business customers, by offering better terms, additional
products and services, and more direct marketing. Even while
striving to meet their CRA obligations, bankers are moving
beyond mere compliance to a recognition that partnerships with
small business make good business sense. 

Now the time has come to build on our successes and to consider
new approaches where we have been less successful than we would
like. Unfortunately, many of the gains I have just described
have been distributed less evenly than we would like. For years
we have heard anecdotes about the special obstacles facing
minority small business people in obtaining credit. Considering
the importance of small business as a engine for job creation
and upward mobility, it is incumbent on us to ensure that small
business does not face special handicaps just when small
business's contributions are most needed. 

To help us determine the nature and extent of the problems that
minority small business people face --  and to begin formulating
workable remedies -- we have moved aggressively on several
fronts. First, as part of CRA reforms, we have begun to collect
information -- for the first time -- on small business
originations on a national basis from every large bank and
thrift -- information that we can use to determine where small
business loans are going -- and, just as important, where they
are not going. This was an important breakthrough. But the data
we have collected tells us nothing about the recipients of those
loans -- information that we need to determine whether illegal
discrimination is preventing some potential small business
borrowers from obtaining credit. In fact, lenders are forbidden
by the Federal Reserve's Regulation B from inquiring about the
race, color, sex, religion, or national origin of an applicant
for a non-mortgage loan. If the Fed changed Reg. B so that
creditors could collect such information -- on a voluntary basis
-- it would materially assist us in the fight against
discrimination. I would urge you to support such a change. 

Fact-finding was an important part of the rationale for the
OCC's Banking on Minority Business program, which we launched
last year in Washington and took on the road to cities all over
America.  This cross-country dialogue brought together community
leaders, minority small business entrepreneurs, and bankers, to
discuss how to break down barriers and build mutually profitable
relationships that will bring economic opportunity to our
neglected and ignored communities. As I listened and learned
during these visits, a number of points became clear -- points
whose relevance goes beyond minority small business to the small
business community at large.

First, there is a need for improved communication between
bankers and potential small business borrowers. In the home
mortgage area, a field we have studied intensively, we have
found again and again that simply making the loan to first-time
borrowers may not be enough for the loan to work. In turns out
that the best performing affordable mortgage loans are those
which are accompanied by education and counseling -- helping
borrowers to negotiate the application process, helping them
understand what lenders expect of them, helping them to manage a
budget, and so forth. 

The same thing appears to be true in the small business field.
Based on what I have heard around the country, there continues
to be considerable misunderstanding between lenders and small
business borrowers on what is expected of both.  Some would-be
entrepreneurs have minimal experience with all the intricacies
of running a financial operation. They need counseling and
education almost as much as they need capital. For their part,
some lenders have limited familiarity with small business
markets generally and with market conditions that prevail in
minority communities. If the relationship is to succeed, both
parties need to think about their partnership in the broadest
sense -- as one that involves an investment of time and
expertise as well as financial capital. 

Second, what I heard in my discussions around the country
convinces me that we regulators can do more to encourage banks
to use those programs that are currently available. Take our
low-documentation program. At last count, only about 200
national banks are using it, because, I am told, the others
continue to believe that examiners will criticize them later for
inadequate documentation. Let me assure those of you here today
that you can take full advantage of that program without fear of
adverse criticism. 

The same thing is true of the public welfare investment
authority embodied in the Part 24 of the OCC's regulations.
Certainly the amount of Part 24 equity investments used by banks
generally, and for small business lending and investing
specifically, has increased in the last few years. But most
national banks are not at their 5 percent of capital threshold
for self-certification of qualifying investments, and only a
handful are at their aggregate statutory 10 percent limit. It is
in your interest -- and in the small business community's
interest -- for banks to take fuller advantage of this program.
I encourage you to do so.

Although we certainly have obstacles to overcome in the years
ahead, the dominant impression I took away from my meetings
across the country was one of energy, pride, and optimism. I met
many lenders and small business people who, through creativity
and perseverance, have became allies in common partnerships. 

I learned about organizations like TELACU -- the East Los
Angeles Community Union -- a one-stop resource for minority
small business people which provides counseling and arranges
loans  -- loans with some of the lowest delinquency rates in the
entire industry. 

I heard about innovations in lending such as second- and third-look programs, whose operative philosophy reflects a dogged
determination to find ways to make loans to worthy borrowers who
might not qualify by traditional standards. 

I heard about encouraging developments in the use of credit
scoring models to reduce the costs of reviewing and monitoring
small business loans, while at the same time paying attention to
the potential problems of inadvertent discrimination in theses
models.  The reduced costs from using these models should help
lenders make more of them. And when they do, it may open to door
for the development of a secondary market for these loans, with
all that implies for increased availability and better pricing.

Most of all, I saw evidence of genuine long-term commitment to
community development, broadly defined. In our discussions
today, I expect to hear and learn more about these innovations
and how we can use them to address the problems that persist. 

When I became Comptroller of the Currency five years ago, I made
a commitment to do everything in my power to promote fair access
to credit and other financial services for all of our people. I
think we have made significant progress to that end. One reason
we are meeting here today is to help ensure that the momentum
continues to build, so that, one year from now, we will have
even more striking progress to report. Wherever the future takes
me personally, let me assure you that the cause of financial
democratization  will always be special to me.  
          
                              # # #

The OCC charters, regulates and supervises more than 2,600 national banks and
66 federal branches and agencies of foreign banks in the United States,
accounting for 56 percent of the nation's banking assets.   Its mission is to
ensure a safe, sound and competitive national banking system that supports
the citizens, communities and economy of the United States.