While they understand that the downturn has led lenders to significantly scale back their business lending activity, financial regulators, including the NCUA, are urging them not to become "overly cautious."
In a Feb. 5 joint statement, the NCUA, Office of Thrift Supervision, Office of the Comptroller of the Currency and the Conference of State Bank Supervisors said they recognize that small businesses play an important role in the economy and know that some are experiencing difficulty in obtaining or renewing credit.
The statement also said financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition "will not be subject to supervisory criticism for small business loans made on that basis."
"Financial institutions should understand the long-term viability of the borrower's business and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry," the regulators wrote.
Between June 30, 2008, and June 30, 2009, loans outstanding to small businesses and farms, as defined in the Consolidated Report of Condition, declined 1.8% by almost $14 billion, the regulators noted. Decreased loan demand, high levels of credit risk and delinquency and lenders needing to strengthen their own capital positions and balance sheets were among the reasons for the decline.