Banking Law

Although the commercial real estate loan loss amortization amendment sponsored by Colorado Representative Ed Perlmutter that we discussed last week made it into HR 5297, which was passed late last week by the House of Representatives, the final version of that amendment (see Section 113 of HR 5207) is subject to so may "ifs, ands, and buts," that, contrary to my view of last week, I doubt it will be of use to many community banks that could benefit from extended loss amortization.

Only banks "eligible" for a Tarp-like capital investment under the act (although supporters will slice and dice you if you dare to call this investment a "Tarp" investment) will be able to take advantage of the loss amortization. "Eligible institutions" do not include banks on the FDIC's troubled bank list, and the way I read the statute, the bank's primary federal regulator will have a de facto veto power over who gets to be classified as "eligible."

The amortization period is determined in accordance with Section 113(c), which refers to "the initial 2-year period referred to in section 4(d)(4)." That section discusses the 2-year period that runs from the date of Treasury's capital investment in institution, so it appears to me that only "eligible institutions" that have actually received a capital investment under this act will be able to take advantage of extended loss amortization. Furthermore, the amortization period depends on increased small business lending during that 2-year period, so it's not clear to me what amortization period the bank begins with and how and when adjustments to that amortization period are made. By the time all this is clarified, maybe another two or three hundred too-small-to-save community banks will have failed.

To prevent wild and crazy risk taking (I presume), the loss amortization only applies to "loan origination that occurred on or after January 1, 2003, and before January 1, 2008." There's also a requirement that the appropriate federal bank regulatory agency for an eligible bank that chooses to amortize loan and REO losses has to adopt regulations within 60 days of enactment of the legislation "defining minimum underwriting standards that must be made for loans made by the eligible institution."  That ought to present another opportunity for federal regulators, who don't like this amortization provision to begin with, to tighten the screws on the ability to benefit from it.

It's better than absolutely nothing, I suppose, but even if this provision makes it through the Senate, at first blush it's a far cry from what was originally intended by the community banks who proposed this legislation. We'll see how this plays out, and whether this legislation is adopted by the Senate, where Republicans have been making noises about blocking it as another "Tarp-like bank bailout."

While we're on the subject of Republicans as enemies of community banks, we note with amusement the statement put out by Colorado Republican Representative Mike Coffman, who publicly supported Perlmutter's amendment and voted for it, and who then almost immediately voted against the bill that contained the amendment. He put out a John Kerryesque statement about how he feels strongly both ways.

In November, let's remember to throw all the bums out, regardless of party affiliation.