Bank Regulation:

Regulatory Impediments to Small Business Lending Should Be Removed

GGD-93-121: Published: Sep 7, 1993. Publicly Released: Sep 7, 1993.

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GAO provided information on small business bank credit and the impact that regulations have on its availability, focusing on whether regulations on small business lending can be safely reduced.

GAO found that: (1) bankers have become more conservative in small business lending because of economic considerations; (2) regulatory burdens related to real estate collateral and appraisal requirements have affected small business lending; (3) although recent interagency initiatives have attempted to increase small business lending by modifying supplementary collateral requirements for real estate appraisals, further clarification of appraisal evaluation guidelines is needed; (4) loan basketing has had a limited impact on small business lending; (5) the most effective way to reduce small business lending impediments is to place greater emphasis on internal controls evaluation and testing, since strengthened internal controls can help to reduce administrative burdens and financial risk and provide banks with incentives and flexibility to improve bank management; and (6) other factors that affect small business lending decisions include the regulations placed on banks, increased presence of nonbank lenders, and increased incidence of borrower bankruptcies and risks under environmental liability laws.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In order to remove regulatory and supervisory impediments to small business lending by banks, the Comptroller of the Currency, Chairman, Federal Reserve Board, and Acting Chairman, Federal Deposit Insurance Corporation, should focus examinations of small business lending activities on the adequacy of banks' internal control systems.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: An internal project to formalize and better document the agency's overall examination of banks' internal controls was completed.

    Recommendation: In order to remove regulatory and supervisory impediments to small business lending by banks, the Comptroller of the Currency, Chairman, Federal Reserve Board, and Acting Chairman, Federal Deposit Insurance Corporation, should focus examinations of small business lending activities on the adequacy of banks' internal control systems.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Closed - Not Implemented

    Comments: The agency does not plan any action. As stated in the Office of the Comptroller of the Currency's (OCC) response to the draft report, the Comptroller's Handbook for National Bank Examiners includes comprehensive review procedures for determining the effectiveness of all principal aspects of a bank's internal control systems. OCC believes that its current procedures are sufficient.

    Recommendation: In order to remove regulatory and supervisory impediments to small business lending by banks, the Comptroller of the Currency, Chairman, Federal Reserve Board, and Acting Chairman, Federal Deposit Insurance Corporation, should clarify the guidance provided to banks for evaluation of real estate pledged as supplementary collateral for small business loans that are not material to the condition of a bank.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Closed - Implemented

    Comments: The revised regulation increasing the real estate appraisal threshold to $250,000 was finalized June 7, 1994. Revision of interagency guidelines for evaluating real estate pledged as collateral is complete.

    Recommendation: In order to remove regulatory and supervisory impediments to small business lending by banks, the Comptroller of the Currency, Chairman, Federal Reserve Board, and Acting Chairman, Federal Deposit Insurance Corporation, should clarify the guidance provided to banks for evaluation of real estate pledged as supplementary collateral for small business loans that are not material to the condition of a bank.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: The revised regulation increasing the real estate appraisal threshold to $250,000 was finalized June 7, 1994. Revision of interagency guidelines for evaluating real estate pledged as collateral is complete.

    Recommendation: In order to remove regulatory and supervisory impediments to small business lending by banks, the Comptroller of the Currency, Chairman, Federal Reserve Board, and Acting Chairman, Federal Deposit Insurance Corporation, should clarify the guidance provided to banks for evaluation of real estate pledged as supplementary collateral for small business loans that are not material to the condition of a bank.

    Agency Affected: Federal Reserve System

    Status: Closed - Implemented

    Comments: The revised regulation increasing the real estate appraisal threshold to $250,000 was finalized June 7, 1994. Revision of interagency guidelines for evaluating real estate pledged as collateral is complete.

    Recommendation: In order to remove regulatory and supervisory impediments to small business lending by banks, the Comptroller of the Currency, Chairman, Federal Reserve Board, and Acting Chairman, Federal Deposit Insurance Corporation, should focus examinations of small business lending activities on the adequacy of banks' internal control systems.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Closed - Not Implemented

    Comments: The agency believes that it already focuses attention on internal control systems, particularly in its review of small business lending. In addition, the agency states that some testing of actual transactions is part of that process.

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