Bankers’ Hours column: Regulators determine how banks make loans

Pat Dalrymple
Bankers' Hours

“What do you mean, you can’t extend my loan?” I’ve heard this question more than once, heard of it a lot more. And the puzzled, even shocked query isn’t coming from a defaulted borrower. In this particular case, it can come from one of the bank’s best borrowers.

The honest answer is, “Because the regulators say so.” It’s nothing personal, just business, and the situation almost always relates to business borrowers. My line of lending in banking was real estate finance, so I would hear it from builders and developers. Bank regulatory agencies, the FDIC, Comptroller of the Currency, and Federal Reserve, watch banks’ “concentration of credit” with a very sharp eye, especially real estate lending, because that category of loan assets can both increase and deteriorate in quality quickly, as we’ve learned from the last two banking crises.

When bank examiners decide that your bank has too big of an investment in construction loans, especially in a defined location, they tell you to reduce the aggregate dollar amount of a certain loan type, and specify when it has to be accomplished. If management doesn’t comply, then a “supervisory agreement” or even a “cease and desist” order can be issued, which is very bad news for a bank: Your lending in other loan types can be curtailed, and your growth limited. The latter fiat is disastrous; banks are creatures that must grow or die, as in being acquired at a fire sale price by a bigger bank.

We’re currently hearing that there’s a severe housing shortage, and not much is being built. True, but there are some market segments that are exceptionally robust. Ultra high-end residences, in premier resort communities worldwide, for example; the 1% are building and buying as fast as they can write $1 million earnest money deposit checks (after all, 1% of the world population has to be a really big number, doesn’t it?) Then there are luxury hotels breaking ground from Rio to Singapore. So I’d guess that there are some banks active in certain resort locations that are pushing the ceiling with big ticket construction and development financing.

Banks have loan limits. A basic number is the “loan to one borrower,” which, in its simple form, without the various nuances, is 15% of a bank’s capital (net worth). If our fictional Second National Bank of Downriver Montana has a net worth of $10 million and gets a super-duper $3 million loan opportunity, it can’t go over $1,500,000. Or, maybe, Second National has been doing a lot of construction loan business in the Snowcloud Resort (also not real) just 20 miles up the road. In both cases, our bank will need to participate out part of the loan. Certainly $1,500,000 in the first instance, and maybe a lot more in the second; possibly 90% of the entire deal.

Participations can be a lot of fun, especially if you’re the lead bank that has to do all of the loan servicing work, and then ride herd on it if it goes bad. The more participants you have to satisfy, the more fun you have. I’m reminded of a bon mot of ranch repartee I heard when I was a kid living on Porcupine Creek southwest of Rifle (real creek, real town) about boys working on the ranch:

“One boy is a boy. Two boys are half a boy. And three boys are no boys at all.”

If your bank is the lead lender, loan participants can be something like that: one is a partner, two are a nuisance, and any more than that … well , you’ve probably become a part time cat wrangler.

What type of loans do the regulators like best? Probably low risk, small loan amounts, with borrowers spread across a broad range of economic tiers so that a downturn in one is counterbalanced by an upturn in another.

How about refrigerator financing for everybody?

Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is


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