Banking Law

Notwithstanding the view of at least one of my readers that community banks who are in trouble because of commercial real estate lending have only their own poor judgment and greed to blame, others (including me) continue to think that we need to cut them some slack.

Three weeks ago, I wrote about proposed legislation being drafted by two Colorado members of the U.S. House of Representatives (one a Republican the other a Democrat) to grant community banks an extended period of time to write-off losses on commercial real estate loans and real estate owned. At the time, press reports indicated the write off period would be ten years.Today, those legislators announced that they had introduced the legislation as the "Capital Access for Main Street Act of 2010" (HR 5249) and that it had been assigned to the House Financial Services Committee. However, the amortization period for losses would be seven, not ten, years.

While ten years would certainly be better than seven, seven is a lot better than "zero." Much better. It's also consistent with the seven-year loss amortization forbearance granted to agricultural banks by the Competitive Equality Banking Act of 1987, which means that the precedent is "tighter."

"CAMS" also contains other deviations from proposals that have previously been discussed by community bankers working on this issue, including:

• Coverage of all insured depository institutions with assets of less than $10 billion (as opposed to all privately-owned institutions regardless of asset size).
• The amortization period is applicable to losses incurred during the three years following the enactment of the law, rather than losses incurred during the period January 1, 2009 through December 31, 2010.
• The benefit of amortization would not be confined to assets on the books of banks prior to the date of enactment.

That last two points might meet some resistance from the federal bank regulators and from community banks who would benefit. Banks who've already been forced to take substantial write-downs recently might argue with some justification that it's unfair that simply because other banks delayed in recognizing losses, they alone should be able to have the benefit of this forbearance. On the other hand, I can foresee a Pandora's Box of heartburn for regulators if (a) the loss amortization right is available to losses taken prior to the date of enactment (what about banks that took those losses and failed?), or (b) the right isn't confined to assets already on the books of the banks who would benefit from the amortization period when this law becomes effective (will it encourage some banks to make bet-the-bank "risky bets" going forward to knowing they can write off the mistakes over an extended period?). Therefore, I think there will be some changes made to this bill, if, in fact, it ends up moving forward.

Nevertheless, this is a good start for those of us interested in preserving as many community banks as possible, even at the risk that the natural unfolding of Darwinian imperatives might be thwarted. We realize that such preservation is anathema to those with a keener sense of "perfect justice" than we possess; however, you have to understand: we suffer from being "lawyers." Worse: bank lawyers.