The Agenda
How small-business issues are shaping politics and policy.
Bank of America has once more found itself on the defensive over small-business lending, in the wake of a Los Angeles Times report that said the bank is demanding some borrowers to “pay off their credit-line balances all at once instead of making monthly payments.” According to the report, customers who can’t pay in full “are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had.”
The claim that Bank of America is casting off its small-business customers — “systematically,” as The Times put it — probably would not surprise many observers. Back in the fall of 2008, the bank’s then-chairman and chief executive, Kenneth Lewis, called its small-business loan portfolio a “damn disaster.” Since then, that portfolio, as reported to the Federal Deposit Insurance Corporation, has shrunk by nearly a third, though the decline has occurred principally in small commercial real estate loans. (Small commercial and industrial loans have actually increased slightly, according to F.D.I.C. data.)
More recently, The Agenda has reported that from 2006 to 2010, Bank of America’s Small Business Administration general business lending fell by 89 percent. Rohit Arora, chief executive of Biz2Credit, which helps small businesses find new loans, said many of his prospective clients are current Bank of America customers. “We are finding pretty consistently that bank of America is almost at the top of the list of banks whose existing customers are shopping around for other avenues right now,” he said.
But Bank of America argues that the concern in this most recent instance is overblown.
It is true that Bank of America notified thousands of borrowers with revolving credit lines that their loans would come due in full. But Jefferson George, a spokesman for the bank, said that the intention was not to force immediate repayment or higher interest rates. Nor did the notices take aim at poorly performing businesses, or businesses in industries or parts of the country where the bank felt overexposed. Instead, he said, it was to rewrite the agreements for a small portion of its line-of-credit loans, giving the bank more control over the terms.
In a revolving line of credit, a company can borrow up to a set credit limit, and as it pays off existing debt, the amount of credit available for borrowing increases. (A credit card is a common kind of revolving credit.) Typically, revolving credit lines last for a year, whereupon they are automatically renewed. But loan officers at Bank of America, and at some of the banks it acquired, opened some credit lines without maturities or formal renewal processes. It was these loans, said Mr. George, that the bank was trying to rein in. “We had a small percentage of clients who had a product that wasn’t in line with our current credit products,” he said. “And all we did was added a maturity date and a renewal process.
“I don’t want to minimize this,” Mr. George continued. “It is a change for customers, and that’s why we gave them a year’s notice.”
In one version of the letter Bank of America sent to clients, dated November 2010 and provided by Mr. George, the bank did indeed set an expiration date for the line of credit, in January 2012, and added terms to the loan agreement that required the borrower to “repay in full any principal, interest or other charges outstanding” by the new expiration date. However, it also said that the credit line could be extended with a separate written renewal notice from the bank — albeit potentially with new terms.
Mr. George would not say on the record how many small-business borrowers became subject to maturity dates and renewals. But he said that the group amounted to “a very small percentage of our roughly 1.5 million small-business credit customers.” Of these, he said, “the majority of customers — more than 90 percent — qualified for renewal at the same rate. The others had the option to pay in full or restructure their agreement with different terms.” Mr. George added that he was unaware of any instance where a customer was not offered an extension one way or the other.
In all, Mr. George said, “98 percent of customers in this small, specific group” have renewed their loans on basically the same terms (but with a maturity date and renewal) or on new terms, which probably included a higher interest rate, a reduced credit line, or both. In some cases, lines of credit became term loans. The number of borrowers with whom Bank of America has not reached any agreement, Mr. George said, amounted to one-tenth of 1 percent of those small-business credit customers. One-tenth of one percent of 1.5 million would be 1,500 customers — not exactly a sweeping retrenchment from the small-business credit market.
Bob Coleman, who publishes a newsletter for the S.B.A. lending industry, said Bank of America is acting prudently by changing the terms of its lines of credit. The borrowers who’ve been left behind, at least as described in The Los Angeles Times article, appear to have been abusing the system. “A line of credit is you borrow the money from the bank, you pay your vendors, and a few months later, you pay back the bank, and you do it again next year,” said Mr. Coleman. But some borrowers, he said, turn what is meant to be a seasonal tool into an evergreen, and effectively never pay down the principal on their lines of credit.
That’s always been a problem for banks, Mr. Coleman said, but it is becoming more untenable today. “The regulators will not allow you to have an evergreen loan,” said Mr. Coleman. “If you have a $100,000 line of credit, and all you’re doing is making interest payments, regulators are going to say that’s not a line of credit, that’s a loan.”
Still, The Los Angeles Times also reported that Bank of America took the opportunity while restructuring these credit lines to add a fee. (So-called commitment fees are typical in revolving lines of credit.) Mr. George acknowledged that the renewal terms call for an annual fee of 1 percent of the commitment, up to $500. But, he added, “in many cases, the fees are reduced, or even waived, based on our relationship with the client.”
Article source: http://feeds.nytimes.com/click.phdo?i=ea6a3a451d8a84bd26cb0875e37088b4