New federal legislation to regulate the financial industry. A large influx of cash to bail out failed financial institutions. Potential changes in U.S. Small Business Administration loan guarantee programs. Proclamations from President Barack Obama that banks have money to lend again.
All represent changes in the banking and lending landscape — and add to the uncertainty of doing business. The result, from Washington to Grand Junction, is that banks are more wary of lending money for commercial projects than they were a couple of years ago.
Many people in the banking industry say the more the government tries to solve financial problems, the worse the economic situation for the country and the longer the pain will linger.
“They’re focused on the government as the solution and not the private sector as the solution,” said Steve Gunderson, Western Colorado regional president of U.S. Bank. “The government will not ever be the viable, productive solution.”
Gunderson likened the government action to engine brakes that are installed in cars to limit their top speeds. “When you put engine brakes on a vehicle, that vehicle won’t go any faster than allowed,” he said.
Gunderson and others in the financial industry are just beginning to weigh the potential effects of the most sweeping changes in federal regulation of the financial system since the 1930s.
Under the legislation approved this summer, banks will fall under the Office of the Comptroller of the Currency, which promises more strict oversight than during the days when commercial loans were more easy to obtain. Banks will reportedly be required to keep capital on hand to cover potentially risky investments. Large financial institutions face tighter restrictions on use of borrowed money.
Many of the details have yet to be finalized, causing more uncertainty for lenders. The uncertainty is added to pressure from federal regulators who advise banks to lend only to companies with solid credit and assets on hand to cover payments.
Still more changes in regulation could be on the way this year.
The Senate is considering the Small Business Jobs Act of 2010, legislation that would establish a $30 billion loan pool earmarked for small business. The House had approved the measure at press time, while the Senate was still considering it.
According to Colorado Lending Source, a private non-profit organization that helps small businesses secure SBA loans, a draft of the Senate version of the bill includes continuation of the 90 percent guaranty on SBA 7 (a) loans through the end of the year, continued fee relief on SBA 7 (a) and 504 loans through the end of the year, higher dollar loan limits on both the SBA 7(a) and 504 programs, more liberal definitions of size so bigger small businesses can access the SBA program and a temporary expansion of the SBA 504 program to allow refinancing of conventional (owner occupied) commercial real estate loans.
The SBA 7(a) program offers a general loan guarantee. The 504 program backs long-term, fixed-rate financing for land, buildings and major equipment purchases.
Gunderson said he’s worried additional SBA-backed lending could have unintended consequences by putting more money in the hands of people who will have trouble paying it back.
“Their (SBA) role is to consider clients turned down by regular banks,” he added.
Financial managers are still reeling from publicity surrounding the Troubled Asset Relief Program (TARP), in which the federal government funded a $787 billion package to help troubled financial institutions in the wake of the sub-prime mortgage crisis and failed investments in mortgage-backed securities
Many people seeking loans assumed the TARP money would result in looser lending practices.
But with lessons learned from financial institutions that closed their doors or merged with other companies, many lenders are actually more hesitant to lend these days, especially with federal regulators telling them to be more careful.
Grand Junction hotelier Kevin Reimer experienced the difficulty of securing a commercial loan when he applied for funding to build a third hotel downtown. He said some lenders wouldn’t consider a loan due to a downturn in the hotel industry. But Reimer said his downtown hotels are often filled.
He said funding was iffy until he found help at U.S. Bank.
Said Gunderson: “Is there money available to lend to those in our marketplace that stay true to sound operating principals? Yes.”
Reimer said the bank considered the loan on the merits of the project and he’s moving forward with construction on a Spring Hill Suites by Marriott hotel at Third and Main streets.
For others seeking commercial loans, the results aren’t always as satisfactory. “Let me put in this perspective: You can’t get a commercial loan,” said Bill Pitts, a real estate agent and Grand Junction City Councilman who’s owned several businesses in Western Colorado.
Steve Meyer, president of Shaw Construction, put it this way: “Until the banks can get their business problems straightened out and the credit markets start opening up so developers can in turn borrow money to do projects, the commercial business is going to be nil.”
Shaw Construction is in the midst of completing six major commercial projects in the Grand Valley. Meyer said his company is busy this year, but he doesn’t see much commercial activity in the pipeline.