After urging from the White House, banks have been taking a second look at loan applications that could be loosening lending standards. Image: Thinkstock
Wall Street banks have been taking the heat for starting a credit crunch in the aftermath of the financial crisis. While major U.S. financial institutions received billions in government bailouts, they’ve been refusing to make loans. Last December President Obama met with bank executives at the White House and urged them to find new ways to increase small business lending. One of the ideas suggested was to take a “second look” at loan applications. Since that December meeting, several major U.S. banks have started second look programs. Nine months later, there are signs that a second look may be making a difference.
Second look gains traction
When the president challenged Wall Street banks to take a second look at lending last December, he actually went further. An Associated Press report on the meeting said that when Obama asked bankers to “explore every possible way” to increase small business lending, He suggested that they take a “third and fourth look” as well. U.S. Bancorp CEO Richard Davis, chairman of the Financial Services Roundtable, said he would present the idea to other members of the group, which represents the country’s largest financial companies.
Lending the old fashioned way
Nine months later, the Financial Services Roundtable says nearly all its members have second-look programs. Members include Bank of America Corp., J.P. Morgan Chase & Co., PNC Financial Services Group Inc. and U.S. Bancorp. The Wall Street Journal reports that second look programs are a throwback to good old-fashioned loan underwriting. Instead of automated analysis of credit scores and other data that drove the industry when credit was easy and cheap, now banks are taking into consideration a borrower’s track record and relationship with them. Some banks search for credit report errors that hurt borrowers the first time around, or ask about unreported sources of income that could lower the risk of a consumer loan. The Journal said the second look program may be having an impact. Last month’s Federal Reserve survey of senior loan officers showed the first easing of lending standards for small businesses since 2006.
Worth a second look
A second look costs more for the banks, but banks are starting to see a business opportunity, instead of merely avoiding risk. Alan Sherter at bNET writes that banks could be implementing second look programs for PR purposes, rather than increasing risk in lending. Also, the loans that are being made are unlikely to jump-start the small business engine that could reduce the unemployment rate. But those caveats probably won’t matter to a struggling local business able to survive, and perhaps even grow, because of a second look.
