Banks Fear New Rules Will Stifle Lending : Real Estate: Good loans may suffer with the bad under regulations meant to curb savings and loan excesses, lenders say.

Local banks are taking a wait-and-see approach to proposals unveiled by President Clinton to encourage banks to lend more money to credit-worthy small- and medium-sized businesses.

At the same time, those banks are bracing for obscure new regulations that will go into effect Friday that address how banks make real estate loans. The new rules are intended to prevent the kind of head-long real estate lending that is largely blamed for the savings-and-loan debacle.

But bankers say the rules are excessive, vague and costly to comply with, and could drastically hinder their ability to make “good” loans that benefit the economy and their communities.

“It’s a total dichotomy,” said W. E. McAleer, president and chief executive of Ventura County National Bancorp in Oxnard, referring to the possible diverse effects of the Clinton proposals and the new real estate lending rules.

If federal bank examiners follow the spirit of the President’s proposals when examining the finances and loan portfolios of individual banks, “that would indeed be a good thing,” said Douglas Peck, executive vice president and chief credit officer at Levy Bancorp in Ventura, the parent of Bank of A. Levy. But he added, “I am skeptical they will. I think there will be further tightening” of lending standards.

Meanwhile, Peck said, the new real estate lending rules are part of “more and more regulation that potentially handcuffs a banker from making a prudent business decision.”

In announcing his proposals last Wednesday, Clinton blamed the so-called credit crunch for stifling the economic recovery. The proposed changes, which federal agencies said would be implemented within three months, would encourage banks to give greater weight to the character and reputation of borrowers, as opposed to more objective criteria such as their financial condition.

Administration officials also said they would lessen regulations requiring extensive documentation to accompany loans, streamline federal examination of banks and make it easier for banks to appeal regulatory decisions. They also promised to limit costly real estate appraisals when property is used as collateral for small-business loans.

The proposals are intended to ease what many view as overreactive lending policies adopted in response to widespread S & L failures brought on by fast-and-loose lending standards in the 1980s. Clinton, echoing the complaints of many bankers and businesspeople, said that regulations are now too restrictive and banks are denying loans to credit-worthy customers.

But Patrick Hartman, chief financial officer at CU Bancorp, the Encino parent of California United Bank, wondered if regulators would quickly take up the President’s call.

Clinton must “convince the regulatory bodies to have a consistent attitude toward character loans,” Hartman said. “It’s going to take awhile to do that.”

And because of new rules adopted in December and due to take effect Friday, bankers say they will be even more limited in their ability to make real estate loans.

The regulations were adopted as part of the Federal Deposit Insurance Corp. Improvement Act of 1991, which told banking agencies to tighten the rules governing real estate lending. Regulators initially proposed establishing specific limits on the amount that bankers can lend relative to property values--otherwise known as loan-to-value ratios. Bankers that did not comply would have faced stiff penalties.

But the agencies were bombarded with complaints from the banking and real estate industries, and instead issued “guideline” loan-to-value ratios. There is no specific penalty for noncompliance, but bankers say that ignoring the guidelines would bring intense regulatory scrutiny.

The benchmark loan-to-value ratios vary according to property type. On raw land, for instance, the maximum loan amount is between 50% and 65% of a property’s value. For owner-occupied single-family and multi-family residences with up to four units, the maximum loan-to-value ratio is between 80% and 95%.

Under the new rules, banks must also adopt written policies covering virtually every aspect of real estate lending. Internal systems must be established to monitor and document compliance, and boards of directors must review the policies at least once a year.

The regulation also requires banks to include in their lending policies plans for diversifying their real estate loan portfolios, so that a bank is not too heavily invested in, say, apartment houses or office projects.

Many banks say the loan-to-value limits aren’t the problem since they are already following similar, self-imposed guidelines. But they object to what they say is micro-management of their loan portfolios by regulators, as well as the burdensome costs of compliance.

While the costs are difficult to calculate, bankers say, they include having workers who spend virtually all their time on extra paperwork and monitoring loans and lending procedures.

Diane Casey, executive director of the Independent Bankers Assn., a Washington-based trade group, said that these costs are particularly troublesome for community banks with smaller staffs. According to an association study, small banks pay a disproportionate share of the industry’s costs of complying with government regulations.

At least some of the costs of the new rules will be passed on to customers, said Mel Moss, executive vice president at TransWorld Bancorp in Sherman Oaks. “But for the customer to come up with the money, it’s a toughie,” and can result in a loan not being made, he said.

McAleer at Ventura County National Bancorp is also worried about the new provision requiring banks to maintain a diversified real estate portfolio. He said that he’d like to invest a large portion of the bank’s assets into developing low-income housing, which he considers a good risk, but that might cause regulators to criticize the bank for not being sufficiently diversified.

“So we’re going to take the conservative approach and segment the portfolio,” he said. “We’ll do this because this would be acceptable to regulators.”