New rule cracks down on rogue lending

By Paul Donsky

The Atlanta Journal-Constitution

State banking regulators have cracked down on a practice that some banks used to lend more money to one borrower than they’re legally allowed.

Georgia banking laws limit a bank from tying up more than 25 percent of its capital with a single borrower.

But during the real estate boom earlier this decade, some banks made multiple loans to separate entities owned by the same borrower that, taken together, exceeded the lending limits.

Known as “loan stacking,” the practice was relatively rare, state banking officials said. But it may have contributed to problems at some banks, including Integrity Bank, the Alpharetta lender that failed last year.

A new rule that went into effect this week is intended to prevent loan stacking, said George Reynolds, senior deputy commissioner of the state Department of Banking and Finance.

“The vast majority of banks in Georgia have internal policies that would limit the possibility of [loan stacking] happening, but just a couple of banks were outliers,” Reynolds said.

Here’s how loan stacking typically worked, said Steve Bridges, executive vice president of the Community Bankers Association of Georgia.

A bank would make loans to a single company developing three subdivisions. Each subdivision was incorporated as a distinct entity, a technicality some banks exploited to exceed lending limits.

Integrity, for example, apparently made 14 loans totaling $83 million to a Florida developer, far exceeding the bank’s lending limit.

Bridges said his organization favors the rule change.

“Basically what the banking department is saying that the law is there to assure that a bank diversified its loan portfolio,” he said.