Restructured Bank of America Loan Program
January 12, 2012 | Business Loans
Once again Bank of America has found itself on the defensive over its small-business lending, in the wake of a Los Angeles Times article that reported the bank is forcing some small businesses to “pay off their credit-line balances all at once instead of making monthly payments.” According to the article, businesses that cannot pay in full “are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had.”
It is no surprise to many that that Bank of America is attempting to cast off its small-business customers — “systematically,” as The Times put it. In the fall of 2008, Kenneth Lewis, the bank’s then-chairman and chief executive, referred to its small-business loan portfolio a “damn disaster.” Since then, that portfolio has shrunk by nearly a third, although the decline has occurred principally in small commercial real estate loans.
Recently, Bank of America’s Small Business Administration general business lending fell by 89 percent. Rohit Arora, chief executive of Biz2Credit, which helps small businesses find loans, said many of his prospective clients are current Bank of America customers. “We are finding pretty consistently that bank of America is almost at the top of the list of banks whose existing customers are shopping around for other avenues right now,” he said.
Bank of America notified thousands of customers with revolving credit lines that their loans would come due in full. However, Jefferson George, a spokesman for the bank, said that the intention was not to force immediate repayment or higher interest rates. Nor did the notices take aim at poorly performing businesses, or businesses in industries or parts of the country where the bank felt overexposed. He said, it was to rewrite the agreements for a small portion of its line-of-credit loans, giving the bank more control over the terms.
With a revolving line of credit, a company can borrow up to a set credit limit, and as it pays off existing debt, the amount of credit available for borrowing increases. Normally, revolving credit lines are a year in length. Loan officers at Bank of America, opened some lines of credit without maturities or formal renewal processes. It was these loans that the bank was trying to rein in. Mr. George said, “We had a small percentage of clients who had a product that wasn’t in line with our current credit products,” he said. “And all we did was added a maturity date and a renewal process.
“I don’t want to minimize this,” Mr. George continued. “It is a change for customers, and that’s why we gave them a year’s notice.”
In one version of the letter Bank of America sent to clients, dated November 2010, the bank set an expiration date for the line of credit, in January 2012, and added terms to the loan agreement that required the borrower to “repay in full any principal, interest or other charges outstanding” by the new expiration date. However, the letter also gave the option for the credit line to be extended with a separate written renewal notice from the bank — with potentially new terms.
Bank of America would not comment on the record how many small-business customers became subject to maturity dates and renewals. However, he said that the group amounted to “a very small percentage of our roughly 1.5 million small-business credit customers.” Of these, Mr. George said, “the majority of customers — more than 90 percent — qualified for renewal at the same rate. The others had the option to pay in full or restructure their agreement with different terms.” Mr. George added that he was unaware of any instance where a customer was not offered an extension one way or the other.
Mr. George said, “98 percent of customers in this small, specific group” have renewed their loans on the same terms or on new terms, which included a higher interest rate, a reduced credit line, or both. In some cases, lines of credit became term loans. The number of borrowers with whom Bank of America has not reached any agreement, Mr. George said, amounted to one-tenth of 1 percent of those small-business credit customers. One-tenth of one percent of 1.5 million would be 1,500 customers — not exactly a sweeping retrenchment from the small-business credit market.
Bob Coleman, who publishes a newsletter for the S.B.A. lending industry, said Bank of America is acting sensibly by changing the terms of its lines of credit. The borrowers who have been left behind appear to have been abusing the system. “A line of credit is you borrow the money from the bank, you pay your vendors, and a few months later, you pay back the bank, and you do it again next year,” said Mr. Coleman. But some borrowers, he said, turn what is meant to be a seasonal tool into an evergreen, and effectively never pay down the principal on their lines of credit.
That’s always been a problem for banks, Mr. Coleman said, but it is becoming more untenable today. “The regulators will not allow you to have an evergreen loan,” said Mr. Coleman. “If you have a $100,000 line of credit, and all you’re doing is making interest payments, regulators are going to say that’s not a line of credit, that’s a loan.”
An alternative to traditional business loans is a Merchant Cash Advance. This program allows a small business to pay the loan back at their own pace, because the amount that is paid back to the lender is an agreed upon percentage of the businesses credit card sales.
