President Encourages ‘Character’ Loans : Banking: Clinton says he’s seeking to ease regulatory scrutiny on loans for small businesses. But it is uncertain whether it will make a difference.

President Clinton said Tuesday that his Administration will try to ease the credit crunch on small businesses by encouraging bankers to resume making so-called character loans, rather than insisting on strict reviews of a prospective borrower’s financial condition.

The Administration wants to “try to reduce the fear” of many banks that “if they make sensible loans, the government will come down on them,” Clinton told the U.S. Chamber of Commerce.

In a coordinated effort, federal regulators are expected to announce a new policy next week for field examiners who audit thousands of commercial banks and savings and loans, banking industry sources said.

The sources said there is likely to be an advisory to examiners to be more tolerant of the character loans, where bankers place great weight on the history and community ties of the borrowers.

This is particularly important for small businesses whose owners “might not come in with an audited financial statement by a (certified public accountant),” said Diane Casey, executive director of the Independent Bankers Assn. of America. “The collateral might be a second mortgage on a borrower’s home.”

Bank examiners have been very strict in reviewing loans, looking for adherence to financial ratios and formulas determining a borrower’s credit-worthy condition.

The memory of the wave of thrift and bank failures in the 1980s--and the tough rules in a major banking law passed in 1991--have resulted in heavy pressure by examiners on bankers.

“Bankers have backed off on making these kinds of loans,” Casey said.

Character loans used to be particularly common at banks in small towns, where local merchants had a continuing need for readily available credit. In metropolitan areas, smaller financial institutions also carved out market niches by offering personal services and attention to borrowers.

Often, this meant making loans to borrowers who were brushed aside by big lenders.

But smaller lenders were willing to take the risks because the borrower’s good character more than offset the fact that the cash flow of their business--or the collateral standing behind the loan--did not strictly justify the loan.

Echoing the President’s theme, Federal Reserve Board Chairman Alan Greenspan told a House hearing on Tuesday that the regulators are eager to “find newer ways to break the back of this credit crunch.”

Encouraging “well-capitalized banks to get back into the business of character loans poses no threat to the safety and soundness of the banking system,” Greenspan told the economic growth subcommittee of the House Banking Committee.

Despite the enthusiasm of the President for character loans and other regulatory changes, it is uncertain whether his position will make a difference in the way federal examiners deal with banks.

The Bush Administration repeatedly exhorted bank examiners in 1991 and 1992 to be more accommodating, keeping in mind the needs of the economy for expanded credit.

But the field examiners continued to take a tough line because they recalled Congressional hearings in recent years where regulators were lambasted for failing to be sufficiently tough in dealing with troubled banks and thrifts.

Robert Clarke’s appointment to a second term as comptroller of the currency was rejected by the Senate Banking Committee last year because the Democratic majority said he had been lax in dealing with troubled Texas banks.